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Michael Michaud is the founder of Invest2Success.com (http://www.invest2success.com/) and the Invest2Success Blog (http://invest2success.blogspot.com/). He has been investing and trading in the financial markets since 1989. He founded Invest2Success.com to empower individual institutional... More
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  • How Much Money Do You Need To Invest In Bonds? 0 comments
    Oct 15, 2012 6:45 PM

    Zacks Investment Research

    Zacks Finance Bond Investing Free Trial

    October 12, 2012 - How Much Money Do You Need to Invest in Individual Bonds? - Review Complete Article Below

    Morningstar Investment Research

    Morningstar Real Life Finance Bond Investing

    Bond Investing Process

    What Are Bond Investments

    Governments and companies may issue bonds to finance operations. Most companies can borrow from banks, but view direct borrowing from a bank as more restrictive and expensive than selling debt on the open market through a bond issue. There are different kind of bond investments issued from governments, corporations.

    Corporate Bonds

    A company can issue bonds just as it can issue stock. Large corporations have a lot of flexibility as to how much debt they can issue: the limit is whatever the market will bear. Generally, a short-term corporate bond has a maturity of less than five years, intermediate is five to 12 years and long term is more than 12 years.

    Convertible Bonds

    A convertible bond may be redeemed for a predetermined amount of the company's equity at certain times during its life, usually at the discretion of the bondholder. Convertibles are sometimes called "CVs."

    Callable Bonds

    Callable bonds, also known as "redeemable bonds," can be redeemed by the issuer prior to maturity. Usually a premium is paid to the bond owner when the bond is called.

    Term Bonds

    Term bonds are bonds from the same issue that share the same maturity dates. Term bonds that have a call feature can be redeemed at an earlier date than the other issued bonds. A call feature, or call provision, is an agreement that bond issuers make with buyers. This agreement is called an "indenture," which is the schedule and the price of redemptions, plus the maturity dates.

    Amortized Bonds

    An amortized bond is a financial certificate that has been reduced in value for records on accounting statements. An amortized bond is treated as an asset, with the discount amount being amortized to interest expense over the life of the bond. If a bond is issued at a discount - that is, offered for sale below its par (face value) - the discount must either be treated as an expense or amortized as an asset.

    Adjustment Bonds

    Issued by a corporation during a restructuring phase, an adjustment bond is given to the bondholders of an outstanding bond issue prior to the restructuring. The debt obligation is consolidated and transferred from the outstanding bond issue to the adjustment bond. This process is effectively a recapitalization of the company's outstanding debt obligations, which is accomplished by adjusting the terms (such as interest rates and lengths to maturity) to increase the likelihood that the company will be able to meet its obligations.

    Junk Bonds

    A junk bond,also known as a "high-yield bond" or "speculative bond," is a bond rated "BB" or lower because of its high default risk. Junk bonds typically offer interest rates three to four percentage points higher than safer government issues.

    Angel Bonds

    Angel bonds are investment-grade bonds that pay a lower interest rate because of the issuing company's high credit rating. Angel bonds are the opposite of fallen angels, which are bonds that have been given a "junk" rating and are therefore much more risky.

    October 12, 2012 - How Much Money Do You Need to Invest in Individual Bonds? by Zacks Investment Research

    Governments and corporations are the primary bond issuers. Bonds usually trade at a discount or premium to their respective principal or par values, which range from a low of $25 for savings bonds to $1,000 and higher for municipal and other types of bonds. Investors receive regular interest payments, which depend on the par value and the stated coupon rate, and get the principal value back on maturity.

    Treasury Bonds

    You can buy Treasury bonds and savings bonds through your broker or directly through the online TreasuryDirect portal. You need a minimum of $100 to purchase a short- or long-term Treasury bond, with additional purchases in $100 increments. The U.S. Treasury also sells EE- and I-series savings bonds, which you can buy for a minimum initial investment of $25. You may also be able to buy these savings bonds through your employer's payroll deduction program. Treasury bonds are subject to federal income tax but not to state and local income taxes.

    Agency Bonds

    Agency bonds are issued by U.S. federal agencies, such as Ginnie Mae, or by government-sponsored enterprises, such as Fannie Mae and Freddie Mac. The U.S. government backs agency bonds, but not the bonds issued by government-sponsored enterprises. You need a minimum of $10,000 to invest in most agency bonds, with additional purchases in $5,000 increments. Ginnie Mae bonds require a minimum $25,000 investment.

    Municipal Bonds

    States, cities and other local governments issue municipal bonds to raise funds for services and construction projects. You need at least $5,000 to purchase most municipal bonds, which typically mature in two to 30 years. Municipal bonds are usually exempt from federal taxes and from state and local taxes for residents of those state and local governments.

    Corporate Bonds

    Companies issue bonds to fund operations and make strategic acquisitions. Corporate bonds usually mature in one to 30 years, although some have maturities of less than a year. Interest payments and capital gains are subject to federal and state income taxes. Corporate bonds typically have par values of $1,000 or more. However, the initial investment requirements could be much higher because you may only be able to buy in round lots of 100 or more.

    Bond Funds

    Unless you want to invest only in Treasury bonds, you will need a substantial initial investment to build a diversified bond portfolio with agency, municipal and corporate bonds. Mutual funds offer broad diversification and professional management at a low cost. Some mutual funds invest in only certain types of bonds, such as government or high-yield bonds, while others invest in a diversified mix of bonds. Mutual fund prices vary, but are usually in the $10 to $30 per unit range. Each unit entitles you to periodic distributions consisting of interest income and capital gains from the mutual fund's holdings.

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    October 12, 2012 - Buying Bonds Vs. Bond Fund by Zacks Investment Research

    If your investment objective is primarily to earn income, both individual bonds and bond funds can be attractive investments. Bonds are promises of companies to pay interest and principal back to investors according to a specific schedule. Bond funds are pools of investor capital used to purchase a number of different bonds, all overseen by a professional money manager.

    Maturity Date

    A bond maturity date is when a bond "comes due," or when the issuer must pay off the value of the bond. A typical maturity value or "par value" of a bond is $1,000. When you buy a bond, you can anticipate receiving your money back upon maturity. This isn't the case with bond funds. Although the bonds within the fund have their own individual maturity dates, the fund as a whole carries no such payback date. As bonds mature in a fund, the manager reinvests the proceeds into new bonds, rather than paying it back to investors.

    Interest Rate Risk

    Interest rate risk affects both individual bonds and bond funds. When market interest rates rise, bond prices fall. While all bonds carry interest rate risk, it afflicts bond funds more than individual bonds. You can hold an individual bond to maturity, at which time it will pay out a predetermined amount regardless of where interest rates are. Since bond funds have no maturity dates, rises in interest rates can create longer-lasting or even permanent declines in value.

    Diversification

    By definition, bond funds are more diversified than individual bonds. By virtue of holding numerous bonds, funds can mitigate the risk of any individual bond failing. If you own a single bond that defaults, you risk losing all your money. In a bond fund, the damage can be minor if just one of hundreds or even thousands of bonds fails to pay.

    Interest Rate

    Most individual bonds pay a fixed interest rate that doesn't vary from the time of issuance until maturity, although some floating-rate bonds are available. Typically, if your bond pays 6 percent interest, you will receive 6 percent interest every year. Bond funds can change their payment rate from year to year or even month to month. Since a fund manager is constantly buying new bonds, the total interest the fund pays can fluctuate regularly.

    Reinvestment

    One of the convenient features of a bond fund is that you can reinvest your interest in more shares of the fund. Since the amount of interest you receive is based on the number of fund shares you own, reinvesting your interest payments will compound your interest over time. With an individual bond, you must take your interest payments in cash, with no way to reinvest them in the same bond.

    Expenses

    Once you pay the commission to buy an individual bond -- if any -- there are no more expenses attached to your investment. A bond fund charges annual expenses to pay the costs of the fund, including the manager's salary. Fund expenses can eat into the net return you get on your investment.

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