Use your discretion to decide whether or not the commission fee is excessive or one you are willing to accept. Purchasing government bonds such as Treasuries U. Many financial institutions provide services to their clients that allow them to purchase government bonds through their regular investment accounts. If this service is not available to you through your bank or brokerage, you also have the option to purchase these securities directly from the government.
In the U. Sponsored by the U. No fees or commissions are charged, but you must have a Social Security number or U. Taxpayer Identification Number, a U. Another way to gain exposure in bonds would be to invest in a bond fund a mutual fund or exchange-traded fund ETF that exclusively holds bonds in its portfolio. These funds are convenient since they are usually low-cost and contain a broad base of diversified bonds so you don't need to do your research to identify specific issues. One drawback of mutual funds and ETFs is that investors do not know the maturity of all the bonds in the fund portfolio since they are changing quite often, and therefore these investment vehicles are not appropriate for an investor who wishes to hold a bond until maturity.
Another drawback of mutual funds is that you will have to pay additional fees to the portfolio managers, though bond funds tend to have lower expense ratios than their equity counterparts. Passively managed bond ETFs, which track a bond index, tend to have the fewest expenses of all. In addition to the Treasury, corporate, and municipal bonds described above, there are many other bonds that can be used strategically in a well-diversified, income-generating portfolio.
Analyzing the yield of these bonds relative to U. Treasuries and relative to comparable bonds of the same type and maturity is key to understanding their risks. Today, many online brokerage platforms make buying bonds of all types easy and cost-efficient.
Therefore, finding the right bonds for your portfolio is key. Depending on your investment goals, tax exposure, risk tolerance, and time horizon, different types of bonds will be most appropriate for you. Most of these platforms will also have tools to screen the universe of bonds and filter based on various criteria such as credit rating, maturity, type of issuer, and yield. Treasury bonds are frequently used as a benchmark for other bond prices or yields.
Any bond's price is best understood by also looking at its yield. As a measure of relative value, the yields of most bonds are quoted as a yield spread to a comparable U. Treasury bond. If you're willing to give up some yield in exchange for a risk-free portfolio, you can use Treasury bonds to structure a portfolio with coupon payments and maturities that match your income needs.
The key is to minimize your reinvestment risk by matching those coupon payments and maturities as closely as possible to your income needs. A bond ladder is a strategy that attempts to minimize these risks associated with fixed-income securities while managing cash flows for the individual investor.
In a bond ladder, the bonds' maturity dates are evenly spaced across several months or several years so that the proceeds are reinvested at regular intervals as the bonds mature. By staggering maturity dates, you won't be locked into one bond for a long duration.
You can buy munis from your online broker or through a brokerage firm that specializes in municipal bonds. Be sure to check that you will qualify for tax-free status based on your residency. You may also be able to use your federal income tax refund to purchase savings bonds. Depending on your brokerage's capabilities and access to international debt markets, you may be able to purchase foreign bonds much the same way as domestic ones. International bond mutual funds and ETFs are also available to trade.
A bearer bond is a fixed-income security that is owned by the holder, or bearer, rather than by a registered owner. Bearer bonds are virtually non-existent anymore as the lack of registration made them ideal for use in money laundering, tax evasion, and any number of other under-handed transactions. They also are vulnerable to theft. Let's start with credit ratings.
In general, the lower a credit rating, the higher the interest rate a company has to offer to compensate for higher risk. Most investors should avoid junk bonds since the risk of permanent losses is much higher than with investment-grade corporate bonds. In addition to credit rating, a bond's interest rate is generally a product of its term.
The longer the term, the higher the interest rate. For example:. But don't just buy bonds with the highest yields based on your time frame; make sure you diversify for risk factors.
For instance, buying only bonds in companies in the same industry or with exposure to the same risks could result in a riskier bond portfolio than you realize.
So think through each bond purchase and how it fits into your portfolio. Are you only a few years from a financial goal? If so, it may be time to start shifting your assets away from the volatility of stocks and adding more corporate bonds to your holdings. However, remember that, as the chart above showed, corporate bonds have historically underperformed stocks over the long term.
Too much exposure to bonds too early can hamper your returns. There's also a psychological side to consider. Many investors struggle with holding stocks through a market downturn. In that case, the higher yields of corporate bonds versus Treasury bonds can help offset the "lost" returns from not owning more stocks.
Discounted offers are only available to new members. Stock Advisor will renew at the then current list price. Average returns of all recommendations since inception. Cost basis and return based on previous market day close. Investing Best Accounts. Stock Market Basics. Stock Market. Industries to Invest In. Getting Started. Planning for Retirement. Retired: What Now? Personal Finance. The second option is to go via mutual funds or exchange-traded funds ETFs.
For investing directly in individual corporate bonds, the investor should have top to bottom knowledge of the fundamentals of the issuing company.
To avoid the hassle of getting into an analysis of fundamentals of the company, one can invest through alternatives such as mutual funds or ETFs that focus on corporate bonds as it gives benefits in the form of diversification and professional management. The risk associated with this investment option differs from the risk involved in purchasing individual bonds.
Investing in corporate bonds makes it easier for the investor to analyze as the investor is required to check only the holding of that specific fund to decide whether or not one should purchase it. Who Should Invest in Corporate Bonds? A corporate bond is a fixed income instrument ensuring regular fixed income and has lower risk sensitivity. These bonds are ideal for risk-averse people who want high returns on their fixed income investments when compared with other fixed income instruments.
Otherwise, one should go with other investment routes accessible to them as investors such as through mutual funds where you actually appoint professionals to do the risk assessment on your behalf and keep an eye through continuous management of the same. Advantages of Corporate Bonds 1. Higher Yields Corporates usually offer higher yields than comparable-maturity government bonds or CDs.
This high-yield potential is, however, generally accompanied by higher risks. Dependable Regular Income People who want steady income from their investments, while preserving their principal, may include corporate bonds in their portfolios.
Security Corporate bonds are evaluated and assigned a rating based on credit history and ability to repay obligations. The higher the rating, the safer the investment as measured by the likelihood of repayment of principal and interest.
Variety Corporate bonds provide an opportunity to choose from a variety of sectors, structures and credit-quality characteristics to meet your investment objectives.
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