Everything you need to know about bonds investing.

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Stocks and Bonds Investing

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You should tailor your bonds investment goals to fit your investment strategy just like your would with stocks. Once you know your tolerance for risk, investment goals, and the information in this Bond Investing Guide, you'll be ready to get your feet wet in this potentially lucrative investment niche.

Available Bond Types

There are many different types of bonds available and they can be used to serve different investment goals depending upon your individual needs. Among the most common types are:

  • Government securities
  • Municipal bonds
  • Corporate bonds
  • U.S. Savings Bonds
  • Mortgage and asset-backed securities
  • Government agency securities
  • Treasury bills
  • Bank certificates of deposit
  • Commercial paper

The first question you should ask yourself is: "What is your current investment status?"

Any personal financial advisor will tell you that it is wise to maintain a diversified investment portfolio consisting of a blend of stocks , bonds , and cash , in a combination that makes sense for current market conditions as well as your income requirements and investment goals.

Unlike other securities, bonds frequently produce a predictable income stream consisting of both interest and repayment of principal. They are generally an excellent way to preserve as well as accumulate capital.

You can select bonds that pay a fixed interest rate, until maturity, if you have a need for current income. You can also save for retirement, or other long-term financial need, by investing in zero coupon bonds which do not provide periodic interest payments. These bonds are sold at a substantial discount from their face amount and provides one payment, on the maturity date, that is is comprised of the principal (original purchase price), plus the total interest earned which is compounded semiannually at the original interest rate.

The term "maturity" means the date which the investor's principal is to be repaid. Depending upon the bond, that date can range from one day up to 30 years. As a rule of thumb, the further out the maturity date is, the greater the return will be.

Although not as great as other securities such as stocks, there is some risk of losing all of your money if the issuer defaults on the payment. Virtually all investments have some degree of risk that you might lose some or all of your investment. Not only is a bond's performance dependent upon market changes, but they are also dependent upon the issuer's credit.

If a bond is considered to be high-risk, then it will offer a higher return in order to entice people to invest in them. Conversely, a low-risk bond, such as a Government-issued bond, pays a relatively low return. Your choice in bonds range from the highest credit quality, usually a U.S. Treasury security, which is backed by the U.S. Government, to bonds that are below investment grade and considered speculative, or "junk bonds".

Before you purchase speculative bonds, it is important to ask yourself if you will remain financially intact in the event that the issuer defaults and does not pay you at maturity.

Another consideration is that if you have to sell it before its maturity date, for some reason, then you will have to accept the current market price for the bond. This may be at, above, or below the price that you paid.

Tax Advantages

Depending upon the bond that you buy you can receive favorable tax treatment. For example, there are never any state or local income taxes assessed on the interest from U.S. Treasury bonds. Likewise, there is no federal income tax on the interest from most municipal bonds, and, in many cases, there is no state or local income tax, either.

Investment Strategies

There are different ways that you can invest in bonds. You could buy individual bonds, invest in a bond fund, which is like a stock mutual fund only it invests in bonds, or you can invest in unit investment trusts. A unit investment trust (UIT) are investment funds that are created with a fixed portfolio of investments that never changes over the life of the trust. They are created by brokerage houses, and are liquidated as investments within the trust are paid off. They provide a steady, periodic flow of income to investors.

Your investment strategy depends upon the amount of money the you have to invest in order to reach your diversification goals, as well as whether you want to manage your investments yourself or have a professional do it for you as in a bond fund.

In order to have a well balanced portfolio, it is crucial for you to be invested, to some degree, in bonds. Financial professionals like to point out that bonds can be used as a hedge against poor stock market performance. As a rule, bonds perform well when the stock market is down, and not as well when the stock market is up.

As always, discuss your investment goals with a professional and let them help you determine the type and mixture of bonds that is best for your particular situation.

Learn more about bond investing at bond basics

The Fundamental of Bonds...

Here, we provide some articles to help you understand the fundamental of bonds.

Bonds Basics: What are Bonds?

Type of Bonds

Risks facing today's bonds investors

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