There are certain things you must understand about bonds before you start investing in them. You may purchase the wrong bonds at the wrong maturity date if you don’t understand these things.
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 bond’s par value is the amount of money you’ll be receiving when the bond reaches its maturity date. When the bond reaches maturity, you will receive your initial investment back.
The date that the bond reaches its full value is called maturity date. 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.’
You’ll receive an interest when the bond reaches maturity and this is called the coupon rate. To find out what the interest will be, you need to use other information since the number is written as a percentage. A bond that has a par value of $2000, with a coupon rate of 5% would earn $100 per year until it reaches maturity.
Banks don’t issue bonds so many people don’t understand ho 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. Using a brokerage means that it’s likely for you to be charged with a commission fee. Shop around for the lowest commissions if you want to use a broker.
Nowadays it’s not so difficult to purchase directly through the Government. A program called Treasury Direct will allow you to purchase bonds and they will be held in one account for easy access. This will allow you to avoid using a broker or brokerage firm.