Why do we invest in bonds?

We invest in bonds as part of our overall goal or strategy to achieve some modicum of diversification within our investment portfolios. And because bonds typically pay out interest semi-annually (twice per year), they may provide a source of cash and income or liquidity that investors may prefer, because the income is relatively predictable and reliable.

What are some important variables I may use when comparing the quality of different bond investments?

Some of the most important variables to compare different bond choices may include: the price of the bond; the interest rate to be paid; the yield of the bond; the term or time to maturity of the bond; rules guiding redemption of the bond; the past performance and history of default of the bond; the creditworthiness or rating of the bond; and the bond's tax status (whether it is taxable or tax-free).

What is a yield curve?

When you compare the yields of different bonds over different periods of time, you use a graph called a yield curve. On the horizontal axis is the time to maturity. On the vertical axis is the yield of the bonds you are comparing. The yield curve graphically demonstrates that in a typical fashion, as bonds rise in maturity, so do their expected yields. Generally, when you compare bonds that are nearer in terms, such as short-term versus inter mediate-term bonds, the expected yields will be higher for the intermediate-term bonds.

What is "principal"?

Principal is the face value of a loan or bond, the original loan amount that is used to calculate interest payments. The principal and interest is what an investor receives when a bond comes due, or matures.

How do I buy bonds?

You can buy bonds through a full-service broker or discount broker. Some large banks also can provide their clients access to bonds. You may also buy bonds directly from the U.S. government attreasurydirect.gov.

 
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