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How to Make Bonds Work for You

Original post by Wanda Thibodeaux of Demand Media

Not all bonds have the same amount of risk, depending on the issuer.

When companies needs money for a project, acquisitions, or everyday operations, they sometimes seek the funds from the public in the form of a bond issuance. If you buy a bond, you are essentially lending money to the company issuing the bond. As with any lender, you are entitled to receive interest for the money you have lent, which is the total value of the bonds purchased. You can sell the bond, or cash it in when it reaches maturity. Similar to any other form of investment, bonds require some research and organization in order to provide good returns.

Step 1

Check your bank records, investment portfolio and other asset records to determine your financial situation. Your current financial state, along with where you want to be down the road, determines how much you can invest in bonds at any given time, the types of bonds to consider most seriously, and how much risk you can take.

Step 2

Look at the different bonds available to you, and gather information from investment advisers, investment publications and websites and company press releases. In addition to having bonds from different agencies and companies, you can choose from standard bonds, callable bonds and zero-coupon bonds. Standard bonds reach maturity after a certain time period and pay interest. Callable bonds allow the issuer to repay the bond loan prior to the maturity date. Zero-coupon bonds pay interest, but don't pay the interest out until the bond matures. Tax-exempt municipal bonds are another bond to consider, as they can end up making you more money than if you had to pay taxes on the return from other bonds.

Step 3

Make a list of the bonds you're considering, and rank them from the greatest risk to the least risk. This allows you to see at a glance which bonds fit your investment needs. For example, the bigger return you seek, the more risk you'll have to take. But if you want to invest conservatively, you can choose a low-risk agency or company from which to purchase your bonds. Generally, government bonds are lower-risk than company bonds, but there is a wider variety of bonds available from corporations.

Step 4

Note the length of the bonds you are considering buying. Short-term bonds mature quickly and are better at meeting short-term financial needs. Long-term bonds don't mature as quickly and thus aren't as readily accessible, but they tend to pay higher interest rates.

Step 5

Look at the coupon rate on the bonds you are considering purchasing. The coupon rate is the rate of interest rate the bond has. Coupon rates largely determine how much of a total return you get from the bond -- the total return is the interest the issuer pays, plus any losses or gains to the bond's market value. Typically, coupon rates decrease as the cost of the bond rises. If you keep the bond to maturity, this is not a huge deal, but it can make a big difference on your return if you have to sell the bond before it matures. When interest rates are high, it often pays to buy long-term bonds because they have a higher price gain than short-term bonds, should the interest rate fall back down. Callable bonds have higher interest, but zero-coupon bonds have a low buy rate.

Step 6

Diversify the bonds you purchase. By not putting all of your eggs in one basket, you can hedge against the possibility of one of bond issuers going out of business, or being unable to settle its bonds.

Step 7

Re-evaluate your bond portfolio regularly and review data associated with the bonds you have. Sell bonds that seem destined for low yields and reinvest the proceeds elsewhere, or hold the cash for future buying opportunities.

                   

Things Needed

  • Company press releases
  • Financial magazines

References

About the Author

Wanda Thibodeaux is a freelance writer and editor based in Eagan, Minn. She has been published in both print and Web publications and has written on everything from fly fishing to parenting. She currently works through her business website, Takingdictation.com, which functions globally and welcomes new clients.

Photo Credits

  • Jupiterimages/Photos.com/Getty Images

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