Understanding What Bonds Are

There are a few things that you must understand regarding bonds before you begin to invest in them. Not understanding these elements might cause you to buy the wrong bonds, at the wrong maturity date.

The three most important elements that you should consider when you purchase a bond include the par value, the maturity date, as well as the coupon rate.

The par value of a bond is a reference to the amount of money you might receive when the bond reaches its maturity date. In other words, you will get your initial investment back when the bond reaches its maturity.

The maturity date is of course the date that the bond will reach its full value. On this date, you will get your initial investment, along with the interest that your money has earned.

Corporate and State and Local Government bonds can be ‘called’ before they reach their maturity, at which time the corporation or issuing Government will return your initial investment, along with the interest that it has earned this far. Federal bonds are not ‘called.’

The coupon rate is the interest that you will get when the bond reaches its due maturity. This number will be written as a percentage, and you must use some other information to find out what the interest will be. A bond that has a par value of $2000, with a coupon rate of 5% would earn $100 per year until it reaches its due maturity.

Because bonds aren’t issued by banks, many people don’t always understand how to go about buying one. There are two ways in which this can be done.

You can make use of a broker or brokerage firm in order to make the purchase for you or you can go directly to the Government. If you make use of a brokerage, you will more than likely be charged for a commission fee. If you want to make use of a broker, try to shop around for the lowest commissions!

Buying directly through the Government isn’t nearly as hard as it once used to be. There is a program called Treasury Direct which will allow you to buy bonds and all of your bonds will be held in one account, that you will have an easy access to. This will make it possible for you to avoid using a broker or brokerage company.

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