Retirement Investing

Bond Investing: Bond Types And Investment Concepts

Financial Planners often recommend bond investing as part of a diversified portfolio. Fixed income investing is considered a low risk strategy. The individual invests an agreed sum for a specific period of time at a predetermined interest rate. In some respects, investing in bonds is similar to holding a term deposit with a bank. The rate of interest is known in advance, the earned interest can be calculated and the principal will be returned at the end of the bond maturity. Whether you want to invest for stable dependable income or for slow capital growth over time, bond investing can be used to achieve your goal. The following article discusses some of the different types and features of bonds.

There are many different types of bonds. Some of the common bond investment vehicles include: municipal bonds, us government bonds, corporate bonds, mortgage and asset backed securities, federal agency securities and foreign government bonds.

Determining which type of investment grade bonds to consider requires matching the features of the bonds with your financial goals and objectives. Some essential features of bond investing include the following:

Maturity: The duration of the bond investment can be classified as short term, intermediate term or long term. Short term bond investing is considered to be 5 years, intermediate term 5-12 years and long term 12 or more years. In practice, investment bonds can be constructed for any duration of time. The above classifications represent the commonly used formats followed by the bond industry.

Redemption: The duration of the bond usually covers the term of the bond. Bonds may be constructed with various call or put provisions. The issuer of the bonds may recall the bond when the prevailing market interest rates drops below a certain rate threshold. This can also happen to mortgage backed securities where an unexpected decline in interest rates can result in the early payout by existing loan holders and the termination of the bond investment. Conversely, the investor may exercise a put if the market interest rates rises or they need to liquidate the investment to raise cash for alternative investment or lifestyle considerations. Prior to investing in bonds, it is prudent to do due diligence on yield call and maturity provisions.

Credit Quality: Bond ratings are allocated to different investment grade bonds according to credit worthiness. The highest grade bonds are considered to be government backed bonds that guaranteed by the relevant government. Agencies such as Standard and Poors or bank research department carry out and conduct bond investment ratings. Some bonds also carry bond insurance which can enhance the quality of the bond.

The price you pay for a bond is affected by the interest rate, price yield, tax status and market forces. Market fluctuations can result in the price of the bond trading at a discount (below face value) or premium (above face value). The yield is affected by the entry price you paid for the bond relative to the interest rate. A lower entry price results in a higher yield. The yield to maturity and yield to call provide more pertinent information to the bond investor because it allows you to calculate total return that considers the purchase price, interest payments you receive and interest on the reinvestment of earned interest. If the taxation status of the bond is classified as tax free, this can influence your bond investing decision.

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