The types of bonds available for investment are U.S. government, municipal, corporate, mortgages and asset-backed securities, federal agency securities and foreign government bonds. Bonds can also be called bills, notes, debt securities, or debt obligations.
Bonds are a unique and important part of any investment portfolio and its essential for investors to get comfortable with them. Buying or selling a bond is different from buying or selling a stock. When you buy stocks, it’s easy to see what it’s selling for and what you see is what you pay. You also know what you will pay in commissions. The price of bonds is too often out of the public eye. Dealers and brokers include their markups in the spread – the difference between the price that buyers are willing to pay (the bid price) and the price that sellers are seeking (the ask price).
Shopping around for bonds can save you hundreds of dollars on commissions and markups. Investors should consider assembling a portfolio of high-quality corporate and Treasury or municipal bonds. Mutual funds offer a one-stop bond diversification, but a portfolio of them typically costs more to maintain than a portfolio of individual bonds.
If you decide to look into individual bonds look to establish a relationship with at least two brokers. Whether you use an individual broker or an online service, try to get as much information as possible before you buy, including the bond’s rating. Ask the following questions:
What is the spread between the bid and ask price? The closer you buy to the bid price, the smaller the markup will be. Also, a wide spread may serve as a warning that the bond may not be easy to sell quickly later on. Because brokers quote different spreads, it pays to check with a couple before you place an order.
Is the bond callable? Bonds may be called (that is, redeemed by the issuer) when falling interest rates make it worthwhile for the issuer to pay off old bonds and issue new ones at lower rates. If a bond is callable, find out what the lowest potential yield is by requesting what is called the “yield-to-worst call”. Any yield above that should be considered gravy.
Which yield are you quoting me? A bond yield is the amount of return an investor will realize on a bond. Though several types of bond yields can be calculated, nominal yield is the most common. This is calculated by dividing the amount of interest paid by the face value.
Resources for Bond Buyers
You can research and get information on bonds by visiting the Financial Industry Regulation Authority (FINRA) web site at www.finra.org. FINRA is a not-for-profit organization authorized by Congress to protect America’s investors by making sure the securities industry operates fairly and honestly. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation of the securities industry.
If you are looking for corporate bonds you can search for an issuer by typing the name of the company in the search field on the FINRA site.
If you are looking for Municipal Bonds you can search for an issuer by visiting the Electronic Municipal Market Access site at www.emma.msbr.org. EMMA is the official repository for information on virtually all municipal securities. EMMA provides free public access to official disclosures, trade data, credit ratings, educational materials and other information about the municipal securities market.
If you are looking for Treasuries you can go to Treasury Direct www.treasurydirtect.gov to learn more about or buy Treasury bills, notes, bonds, and Treasury Inflation-Protected Securities (TIPS) directly from the government.
James De La Torre has conducted federal benefit and financial planning seminars in all of the country. He is a key note speaker at federal conferences and works with federal professional organizations on ways to improve the communication of federal benefits to their membership. Jim has appeared as a guest on “Fed Talk” on the Federal News Radio network, discussing the gaps in federal benefits and the financial impacts employees face. Jim holds a Charter Retirement Planning Counselor’s (CRPC) designation from the College or Financial Planning and is a member of the Financial Planning Association. Please direct questions or comments directly to James at firstname.lastname@example.org