Friday, December 24, 2010

Understanding Bonds by Ravinder Tulsiani

Understanding Bonds by Ravinder Tulsiani

There are certain things you must understand about bonds before you
start investing in them. Not understanding these things may cause you
to purchase the wrong bonds, at the wrong maturity date.

The three most important things that must be considered when
purchasing a bond include the par value, the maturity date, and the
coupon rate.

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

The maturity date is of course the date that the bond will reach its
full value. On this date, you will receive your initial investment,
plus 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 thus far. Federal bonds cannot be

The coupon rate is the interest that you will receive when the bond
reaches maturity. This number is written as a percentage, and you must
use 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 maturity.

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

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

Purchasing directly through the Government isn’t nearly as hard as it
once was. There is a program called Treasury Direct which will allow
you to purchase bonds and all of your bonds will be held in one
account, that you will have easy access to. This will allow you to
avoid using a broker or brokerage firm.

About the Author: Ravinder Tulsiani is a published author who has
written about personal finance, real estate, self-help and online