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Monday, September 1, 2014

Bond buying tips

What to look for when purchasing bonds
U.S. bonds are considered low risk, but often yield less than alternate investments

Bond yields vary considerably, and changes in the bond market can affect the performance of bonds making it a good idea to be aware of smart ways to buy bonds. For example, according to CNN Money, no single bond fund can provide big returns on investment like they used to. For this reason a diversification of bond investing is recommended. Before purchasing any bonds, it is a good idea to learn about them, and for that the Securities Industry and Financial Markets Association or SIFMA provides a helpful guide.

Strategy


An effective bond buying method should ideally account for inflation, diversification, duration, risk and yield. A good bond buying strategy also helps reach individual investing and financial planning goals. For example, a younger investor seeking an investment less volatile than stocks, but with higher yield than federal bonds may choose to purchase a BRIC bond fund that invests in debt instruments issued by Brazil, Russia, India and China. Moreover, these countries have credit ratings ranging from BBB to AA, and have 10-year bond yields as high as 12 percent per Trading Economics

Variables


Key variables that affect bond buying are interest, bond rating, price and the maturity date of the bond. Bond rating agency Morningstar highlights the influence of these variables including how changes in bond interest rates can negatively affect the price of previously issued bonds on the secondary bond market. Furthermore, the affect of bond default risk puts upward pressure on bond yields yet a positive economic outlook can downwardly influence credit risk. As bond prices rise and fall with changes in economic and market conditions, smart bond buyers can determine whether or not those new prices are good based on yield and in comparison to competing bond investments. 

Products


The type of bond product purchased can have a significant impact on return on investment. For instance, according to the Financial Regulatory Authority or FINRA, although international bonds can offer higher yields, they are subject to sovereign risk. FINRA describes sovereign risk as the complete risk that includes currency and interest rate risk. To avoid these risks, international bonds that appreciate against the dollar and have stable or rising yields with reasonably low default risk are more ideal. Other ways to buy bonds are through tax free municipal bond index funds because they can optimize retirement income and be useful in financial planning. Corporate bonds and in some cases, bond trading, also offer investors a range of options.

Mechanisms


Bonds can be purchased using a number of mechanisms. Treasury Direct can be used to buy bonds directly from the U.S. Government instead of through a broker. If a broker is used, Investopedia warns that even if a broker does not charge commission, they may increase the bond price instead. In light of this, investors can also use self-guided discount brokerage accounts to lower the cost of purchasing bonds. In some cases a brokerage account is necessary to buy bonds. For example, FINRA states international bonds can be purchased, but usually with the help of a broker. In any case, smart ways to buy bonds factor in the effectiveness of the bond buying mechanism relative to cost, ease of use, and availability of product in terms of overall return.

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