How to Buy Debt
Determine what type of bond to buy., Purchase U.S. Treasury Securities., Find a securities broker., Purchase municipal bonds., Invest in corporate bonds., Consider bond mutual funds or bond ETFs.
Step-by-Step Guide
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Step 1: Determine what type of bond to buy.
There are a variety of different bonds that you can acquire as an investment, including U.S.
Treasury Bonds, municipal bonds and corporate bonds.
Bonds are debt securities, which means that you are lending money to the bond issuer (government or corporation) and they promise to pay you back with interest over a certain period of time., U.S.
Treasury bonds are the safest bonds in which to invest since the U.S.
Government backs them.
There are a variety of treasury bonds that you can purchase directly from the U.S. treasury at http://www.treasurydirect.gov.
These include Treasury bills (T-bills), which are non-interest paying and short-term (1-year or less), notes, which have terms up to ten years and pay interest semiannually, and bonds, which have terms over 10 years.Treasury bonds mature in 30 years, which means it will take 30 years to reach the full, face value of the bond.
You receive interest payments every six months with these bonds.
I Savings Bonds are purchased at face value and you earn interest over the life of the bond.
These are low risk savings bonds.
EE and E Savings Bonds are purchased at face value and pay interest based on current market rates for up to 30 years.You can also purchase savings bonds from local banks or through brokers, however, you will be required to pay a fee in addition to the amount of the initial bond investment.
It makes more financial sense to purchase your treasury bonds directly from the U.S.
Treasury and save yourself the additional costs. , A securities broker is licensed and registered to buy and sell securities.
There are a variety of brokers, including: full-service, who help clients with various investment needs; discount brokers, who buy and sell bonds for clients but do not give investment advice; and online brokerages, which provide full-service investment advice and investment via the internet.
When choosing a broker, consider the following:
Is the broker experienced, credentialed and registered with the Securities and Exchange Commission? You should ask the broker for their credentials and discuss their experience in the industry.
Be sure that the broker has access to the bonds you want.
If you want to invest in municipal bonds, determine whether the broker handles those types of bonds.When speaking with a potential broker, ask for a full list of their fees and compare those with other brokerages.For a list of top-rated online brokers that trade bonds, visit: http://www.kiplinger.com/article/investing/T052-C000-S002-best-online-brokers-2014.html. , Interest paid from municipal bonds is exempt from federal income taxes.
These bonds may offer a better investment than bonds with a higher rate of return if you are in the highest federal income tax bracket of 35%.
You can own municipal bonds through municipal-bond unit trusts, through mutual funds, or individually.
Check the bond rating before buying any fixed income security as lower-rated bonds have higher risks of default.
Anything lower than a BBB rating (BB, BA, CCC etc.) is a risky investment.
You can view bond ratings at: https://www.moodys.com/page/lookuparating.aspx.
Administrators or investment advisors manage municipal-bond unit trusts and mutual funds.
If you purchase bonds through these agents, they will take your financial investment and spread it across a variety of bonds.
This reduces your risk through diversification.
You are typically charged a percentage of your initial investment as a sales commission.
Individual bonds are purchased through a bond broker and the commission or fee is included in the price that you pay for the bond.
By purchasing an individual bond, you are not able to spread out your risk., Corporate bonds are issued by corporations and typically pay higher rates of return than treasury or municipal bonds.
Typically, the bond holder will receive periodic interest payments until the bond reaches maturity.
The interest income generated by these bonds is taxable.Just as with municipal bonds, you should check the bond’s rating to make sure that you are making a sound investment.Purchasing your bonds through a mutual fund reduces the overall risk to your investment.
Mutual funds are able to diversify your investment portfolio much more so than a person investing in individual corporate bonds., Bond mutual funds and bond ETFs allow you to invest many — sometimes hundreds — of bonds.
However, unlike individual bonds, bond mutual funds and ETFs can potentially decrease in value, as the underlying bonds can be sold before they mature.
On the other hand there is also more potential for you to receive greater gains when you invest in this way. -
Step 2: Purchase U.S. Treasury Securities.
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Step 3: Find a securities broker.
-
Step 4: Purchase municipal bonds.
-
Step 5: Invest in corporate bonds.
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Step 6: Consider bond mutual funds or bond ETFs.
Detailed Guide
There are a variety of different bonds that you can acquire as an investment, including U.S.
Treasury Bonds, municipal bonds and corporate bonds.
Bonds are debt securities, which means that you are lending money to the bond issuer (government or corporation) and they promise to pay you back with interest over a certain period of time., U.S.
Treasury bonds are the safest bonds in which to invest since the U.S.
Government backs them.
There are a variety of treasury bonds that you can purchase directly from the U.S. treasury at http://www.treasurydirect.gov.
These include Treasury bills (T-bills), which are non-interest paying and short-term (1-year or less), notes, which have terms up to ten years and pay interest semiannually, and bonds, which have terms over 10 years.Treasury bonds mature in 30 years, which means it will take 30 years to reach the full, face value of the bond.
You receive interest payments every six months with these bonds.
I Savings Bonds are purchased at face value and you earn interest over the life of the bond.
These are low risk savings bonds.
EE and E Savings Bonds are purchased at face value and pay interest based on current market rates for up to 30 years.You can also purchase savings bonds from local banks or through brokers, however, you will be required to pay a fee in addition to the amount of the initial bond investment.
It makes more financial sense to purchase your treasury bonds directly from the U.S.
Treasury and save yourself the additional costs. , A securities broker is licensed and registered to buy and sell securities.
There are a variety of brokers, including: full-service, who help clients with various investment needs; discount brokers, who buy and sell bonds for clients but do not give investment advice; and online brokerages, which provide full-service investment advice and investment via the internet.
When choosing a broker, consider the following:
Is the broker experienced, credentialed and registered with the Securities and Exchange Commission? You should ask the broker for their credentials and discuss their experience in the industry.
Be sure that the broker has access to the bonds you want.
If you want to invest in municipal bonds, determine whether the broker handles those types of bonds.When speaking with a potential broker, ask for a full list of their fees and compare those with other brokerages.For a list of top-rated online brokers that trade bonds, visit: http://www.kiplinger.com/article/investing/T052-C000-S002-best-online-brokers-2014.html. , Interest paid from municipal bonds is exempt from federal income taxes.
These bonds may offer a better investment than bonds with a higher rate of return if you are in the highest federal income tax bracket of 35%.
You can own municipal bonds through municipal-bond unit trusts, through mutual funds, or individually.
Check the bond rating before buying any fixed income security as lower-rated bonds have higher risks of default.
Anything lower than a BBB rating (BB, BA, CCC etc.) is a risky investment.
You can view bond ratings at: https://www.moodys.com/page/lookuparating.aspx.
Administrators or investment advisors manage municipal-bond unit trusts and mutual funds.
If you purchase bonds through these agents, they will take your financial investment and spread it across a variety of bonds.
This reduces your risk through diversification.
You are typically charged a percentage of your initial investment as a sales commission.
Individual bonds are purchased through a bond broker and the commission or fee is included in the price that you pay for the bond.
By purchasing an individual bond, you are not able to spread out your risk., Corporate bonds are issued by corporations and typically pay higher rates of return than treasury or municipal bonds.
Typically, the bond holder will receive periodic interest payments until the bond reaches maturity.
The interest income generated by these bonds is taxable.Just as with municipal bonds, you should check the bond’s rating to make sure that you are making a sound investment.Purchasing your bonds through a mutual fund reduces the overall risk to your investment.
Mutual funds are able to diversify your investment portfolio much more so than a person investing in individual corporate bonds., Bond mutual funds and bond ETFs allow you to invest many — sometimes hundreds — of bonds.
However, unlike individual bonds, bond mutual funds and ETFs can potentially decrease in value, as the underlying bonds can be sold before they mature.
On the other hand there is also more potential for you to receive greater gains when you invest in this way.
About the Author
Mary Webb
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