Bonds Purchasing

By: EconomyWatch Content   Date: 30 October 2009

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There are several things to consider before bonds purchasing, although this seems to be easier than purchasing other investment vehicles, such as stocks and commodities. The ever changing bond market conditions can make you confused about what to buy and when to buy. When purchasing bonds, you are lending money to the issuer and the issuer will pay back your principal amount and interest earnings upon maturity. Some bonds, such as the US Treasury bonds, offer interest earnings once in every six months.

Bonds Purchasing – Things to Consider

Here are some useful tips for bonds purchasing:

Stability and Yield: Although bonds purchasing is safer than buying stocks, the returns are generally lower than those from stocks or commodities. Many investors purchase bonds to diversify their portfolio or to reduce risks. If you are risk-averse and do not want to make much money either, bonds purchasing should be your option. Even within bonds, US Treasury bonds offer more stability and security because they are insured by FDIC and guaranteed by the US Government.

Maturity Period: This is the period after which the bond issuer pays your money back. Investors obtain the principal amount in full with interest charges after the maturity period. While short-term bonds have a shorter maturity period, long-term bonds have a maturity period ranging from 10 to 30 years. Investors opt for short-term bonds when bonds purchasing, if they do not want to take risks and plan to do a major purchase within a few years. Long-term bonds offer higher interest rates than short-term bonds.

Bond Price: A bond issuer can pay off bonds before the maturity period. Bond issuers engage in “calling” when they do not want anymore investments, or want to offer bonds at lower interest rates due to changing macroeconomic scenarios. Market value of a bond is directly related to interest rates. The market prices of bonds will increase if interest rates decrease and vice versa. The price of a bond in the secondary market will change according to the change in interest rates. If you sell your bond before the maturity period, the price can be lower or higher than the original price, based on the prevailing interest rates. Investors can opt for US Treasury bonds, such as 10 year or 30 year bonds, based on their investment objectives.


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