Buying Bonds – A How to Guide

Before buying bonds for the first time, it’s important to understand the basics.   Here is a video summary of what you need to know to buy bonds.  You can find the longer text version below this video:

View Lesson 2

First and foremost, buying bonds is not like buying stocks.  Your bond broker is not required to give you the best price available when you buy a bond, and many bonds do not trade actively enough to get out at a good price if you need to sell.

There are many things that are not standard about the bond market, however there are unique features to every bond including CUSIP number, whether it is a callable bond, Par Value, credit rating, maturity date, and tax status.  While the level of risk also varies when buying different types of bonds, every bond has interest rate risk, and most bonds have some or all of the 6 risks talked about here.

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Unfortunately we don’t give access to view bond prices here at LearnBonds yet, so you will also need some resources where you can find a bond’s price, and once you get there you will need to know how to read a bond table and how to read a bond quote.

Lastly don’t forget that when buying bonds, the bond’s price will always move inversely to its yield.

 

Buying Bonds Through A Broker

Once you understand the basics, the next thing you’ll want to do is choose a bond broker.  There are many choices including online brokers like Fidelity or Charles Schwab and full service brokers like Raymond James or Merrill Lynch.  If you choose to go through a full service broker make sure you avoid dumb advice when choosing your bond broker, and remember that you can always buy treasury bonds commission free with Treasurydirect.gov as well as with may online brokers.

If you don’t want to go through the extra research that is required when buying bonds on an individual basis, visit our Bond Funds section to learn more about Bond Mutual Funds and ETFs.

 

Which Type of Bond Should You Buy?

There are 4 categories of bonds you can buy: Municipal Bonds, Treasury Bonds, Corporate Bonds  and Agency Bonds. As you will learn in those sections, there are two primary factors which are going to influence your decision on which type of bond to buy: credit ratings and how interest income is taxed.

Once you have decided on the type of bond you want to buy, you’ll want to learn about the yield curve and bond duration, which will help you determine what you want the maturity of the bond to be.   If you’d like some additional ideas on which bonds to buy from the staff and guest writers here at LearnBonds, visit our section on bond trade ideas.

 

Buying Junk Bonds, Leverage, and How to Short Bonds

Since the federal reserve has been so active in the market over the last few years, interest rates are at historical lows.  Because of this some investors are starting to look at riskier investments which pay a higher yield, like junk bonds.  We have a great series on how to buy junk bonds written by LearnBonds contributor The Masked Investor.  As junk bonds have a higher risk of default than investment grade bonds however, you will also want to know what happens when a corporate bond defaults?

With all the talk about interest rates moving higher many people in the trading community are now asking, can you short a bond and use leverage when buying bonds? While the answer is technically yes to both, most people find it easier to do this using Bond Market ETFs.  For those that want to know more, read our article on how to short the treasury market using Bond ETFs.

Looking for something on buying bonds that we have not covered?  Hit us in the comments section and we will get it added asap!

    Want to learn how to generate more income from your portfolio so you can live better?  Get our free guide to income investing here.

Learn more about the topics mentioned in this video:

6 Risks involved with investing in bonds
All about CUSIP numbers
All about bonds and taxes
Investment Ideas
Shorting the treasury market using ETFs

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Comments

  1. Chuck says

    I’m interested in convertible bonds. Could you direct me to information similar to the information that you provide on your learning bonds site that discusses evaluating and investing in convertible bonds?

    Thank you.

  2. Sherry says

    I have a municipal bond portfolio consisting of too many individual local and state bonds to monitor credit quality myself. I am considering outside management, but with yields so low I’m hoping there are other options. I know I can no longer rely on the credit ratings provided by Fitch, S&P or Moody’s. The financial disclosures on EMMA can lag as much as two years or more. Thanks for any suggestions.

    • David Waring says

      Hi Sherry,

      Thanks for the comment. Have a look at bondview.com which, in addition to the credit rating, gives you the implied credit rating based on the price of the bond. Let us know if that is not what you are looking for!

      Best Regards
      Dave

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