|Course 103: Buying Bonds|
|Things to Consider When Buying Bonds|
Bonds are more stable than stocks but riskier than certificates of deposit or money market accounts. They are not great for making your money grow rapidly, but they can help to diversify your portfolio. Most traditional bonds provide a relatively stable source of interest payments and a return of your principal.
The purchase of a bond is basically a loan to the issuer: a loan that must be repaid to you at maturity. Bonds differ in their maturity.
Maturity is the time at which a bond issuer pays you back the money you loaned. If you hold your bond until it matures, you get back all of the money you paid for it, unless the issuer has defaulted. Shorter-term bonds have maturities of only several years. Long-term bonds take from 10 to 30 years to mature. In general, the longer the maturity, the greater the total of interest payments you will receive from the bond.
If you would like to conservatively invest money for a major purchase to be made within the next few years, consider a short-term bond. These types of bonds will generally maintain your principal without much risk. If the timeline of your investment is longer, you may want to consider a longer-term bond.
Long-term bonds will typically offer a higher yield in exchange for the use of your money for a longer period.
The bond issuer may decide to pay off a bond before its maturity date. This is known as "calling" a bond. Bonds are called because an issuer no longer needs to borrow the money, or because interest rates have fallen and the issuer wants to issue new bonds at a lower interest rate.
A bond's market value is directly related to interest rates. As interest rates go up, the market prices of bonds go down and vice versa. Until a bond matures, its price on the secondary market constantly changes in response to changes in interest rates. If you sell your bond before it matures, the price may be more or less than you originally paid for it, depending on current interest rates.
The other factor affecting the prices of bonds is the credit quality of a bond. If a bond issuer is at risk for default, it will be assigned a low credit rating. Credit ratings are based on a grading system, with AAA being the highest possible mark, all the way down to a grade of C. Rating agencies include Moody's Investors Service and Standard & Poor's.
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