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There are certain things you must understand about bonds before
you start investing in them. Not understanding these things may
cause you to purchase the wrong bonds, at the wrong maturity date.
The three most important things that must be considered when
purchasing a bond include the par value, the maturity date, and
the coupon rate.
The par value of a bond refers to the amount of money you will
receive when the bond reaches its maturity date. In other words,
you will receive your initial investment back when the bond
reaches maturity.
The maturity date is of course the date that the bond will reach
its full value. On this date, you will receive your initial
investment, plus the interest that your money has earned.
Corporate and State and Local Government bonds can be ‘called’
before they reach their maturity, at which time the corporation or
issuing Government will return your initial investment, along with
the interest that it has earned thus far. Federal bonds cannot be
‘called.’
The coupon rate is the interest that you will receive when the
bond reaches maturity. This number is written as a percentage, and
you must use other information to find out what the interest will
be. A bond that has a par value of $2000, with a coupon rate of 5%
would earn $100 per year until it reaches maturity.
Because bonds are not issued by banks, many people don’t
understand how to go about buying one. There are two ways this can
be done.
You can use a broker or brokerage firm to make the purchase for
you or you can go directly to the Government. If you use a
brokerage, you will more than likely be charged a commission fee.
If you want to use a broker, shop around for the lowest
commissions!
Purchasing directly through the Government isn’t nearly as hard as
it once was. There is a program called Treasury Direct which will
allow you to purchase bonds and all of your bonds will be held in
one account, that you will have easy access to. This will allow
you to avoid using a broker or brokerage firm.
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