January 2003

BRIEFS:

A Relook at Bond Investing

As we get older, many increase their holdings in bonds to protect against the more volatile nature of stocks.

Essentially, a bond is a loan the investor makes to the federal government, state or local governments or to a corporation in exchange for current interest and principal repayment on maturity.

Many financial planners suggest shifting small amounts of money from stocks to bonds steadily over time, a strategy known as "dollar cost averaging"

Experts advise their clients that bonds investing is not without risks as can be attested to by recent corporate bond defaults. Of course, this is not the case with Treasuries. But remember when interest rates rise, newer bonds,issued at higher interest rates, cause older bonds with lower rates to become less valuable and subsequently their prices fall. Also an improving economy hurts bonds because when corporate profits rise, the underlying stock becomes more attractive.

Investors have many options in the type, amount and length of debt instruments.

Treasury Bills Short-term; interest paid at maturity (13, 26 or 52 weeks); subject only to federal taxes and sold in increments with a minimum investment of $ 1,000
Treasury Notes Intermediate-term; maturity date of 2, 5 or 10 years; interest paid twice a year; subject only to federal taxes and sold in increments with a minimum investment of $ 1,000
Treasury Bonds Long-Term; mature in 30 years; interest paid twice a year; subject only to federal taxes and sold in increments with a minimum investment of $ 1,000
Zero-coupon Bonds Sold at a discount; Appreciated face value and accrued interest (which is taxed yearly) paid at maturity; subject only to federal taxes and sold in increments with a minimum investment of $ 1,000
Municipals Bonds
(MUNIS)
Bonds sold by state and local governments; paid interest is free from federal taxes and often from state or local taxes (Many states exempt only their own state bonds, but tax other state issued bonds)
Corporate Bonds Higher interest rates than Treasuries but riskier because of the potential for default or bankruptcy.

 

An investor can buy U S government bonds directly from the Treasury or invest in mutual funds that hold government debt instruments. These mutual funds hold bonds with different maturities, issued at different interest rates and are constantly traded, to avail the fund of changing interest rates (See your own appropriate advisor for your specific suitability)

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