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Friday, February 14, 2014

Understanding Bonds

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

The three most important things that must definitely be considered when purchasing a bond add the par value, the maturity time frame, and the coupon rate.

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

The maturity date is certainly the date that the connect will reach its full importance. On this date, you will certainly receive your initial investment, in addition to the interest that your money features earned.

Corporate and State and Municipality bonds can be ‘called’ previous to they reach their maturity, where time the corporation or providing Government will return your primary investment, along with the interest so it has earned thus far. Federal bonds cannot be ‘called. ’

The coupon rate is the interest that you're going to receive when the bond actually reaches maturity. This number is written to be a percentage, and you must use other information to uncover what the interest will be. A bond that has the par value of $2000, with a coupon rate of 5% would earn $100 annually until it reaches maturity.

Because bonds aren't issued by banks, many people don’t understand how to go about buying one. There are two ways this really is done.

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

Purchasing directly throughout the Government isn’t nearly as hard since it once was. There is a program called Treasury Direct which will allow you to purchase bonds and all of your respective bonds will be held available as one account, that you will have availability to. This will allow someone to avoid using a broker as well as brokerage firm.


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