Saturday, February 19, 2011

How to Invest in Bonds For Newbie

How to Invest in Bonds For Newbie

Author: goodmast3r

Bond is a debt security, which the issuer owes the holders debt. Depends on the terms of the bond, the issuer is obliged to pay interest or called coupon and/or to repay the original principal at a later date or when it's mature. Bond issuer can be a company, goverment or municipalities. They issue bond to raise fund. The interest rate of the bond depends on the strength of the company issued the bond. For example, a blue chip company like Walmart, Exxon Mobile, or General Electric which has lower risk of defaulting on its debt will give lower interest than non blue chip company. Higher interest rate means the bond is riskier. Bond is considered much safer than stock.

There are several ways to invest in bonds like purchasing individual bonds, or investing in bond funds. Most individual bonds are bought and sold at over-the-counter (OTC) market. In OTC market there are securities firms and banks that trade bonds, brokers who buy and sell bonds on behalf of customers, and dealers, who keep bonds to buy and sell. Bonds which are sold in OTC market are usually sold in $5,000 denominations. Bond prices in secondary market usually include a markup for the dealer's profit. Each broker establishes its own prices, which will vary depending the type of bond, and the size of transaction. If you're interested in buying a new bond in the primary market when it is first issued, your will need a help from an investment advisor who will provide you with all you need.

Bond funds are like stock funds, which professionals will select and manage a portfolio of bonds for a fee. There are also bond funds that follow a market or a specified index of bonds. Bond fund does not have a maturity date because bonds can be added and eliminated from the portfolio. Most funds will charge you annual management fees, and some charge for selling or buying the fund. This charges and fees will lower your return, so you need to aware of this when calculating expected returns. Many bond funds also need a minimum initial investment.

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