Bond investing basics cnn money

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This would increase the price of the bond. This would decrease the price of the bond. Buying Bonds The most common way to buy bonds is either through a broker, mutual fund, exchange traded fund, or directly from a government. Through A Broker You can buy bonds through a broker, just like you can buy stocks and other investments. The bonds you buy are typically sold by investors.

Depending on the interest rate market, you may be able to buy the bond at discount. Through the Government You can buy government bonds directly through the federal government. The Treasury Direct website allows you to buy government bonds. Bond Ratings There are organizations that rate the quality of each bond by assigning a credit rating.

Generally, governments have higher credit ratings than companies, and so government debts are less risky and carry lower interest rates. If a bond is priced at a premium, the investor will receive a lower coupon yield, because they paid more for the bond. If it's priced at a discount, the investor will receive a higher coupon yield, because they paid less than the face value. Bond prices tend to be less volatile than stocks and they often responds more to interest rate changes than other market conditions.

This is why investors looking for safety and income often prefer bonds over stocks as they get closer to retirement. A bond's duration is its price sensitivity to changes in interest rates—as interest rates rise bond prices fall, and vice-versa. Duration can be calculated on a single bond or for an entire portfolio of bonds. Bonds and Taxes Because bonds pay a steady interest stream, called the coupon, owners of bonds have to pay regular income taxes on the funds received.

For this reason, bonds are best kept in a tax sheltered account, like an IRA, to gain tax advantages not present in a standard brokerage account. Issuers of bonds, on the other hand, such as corporations, often receive favorable tax treatment on interest, which they can deduct from their taxes owed. Local governments and municipalities may issue debt too, known as municipal bonds.

Issuers of Bonds There are four primary categories of bond issuers in the markets. However, you may also see foreign bonds issued by corporations and governments on some platforms. Corporate bonds are issued by companies. Companies issue bonds—rather than seek bank loans for debt financing in many cases—because bond markets offer more favorable terms and lower interest rates. Municipal bonds are issued by states and municipalities.

Some municipal bonds offer tax-free coupon income for investors. Government sovereign bonds such as those issued by the U. The entire category of bonds issued by a government treasury is often collectively referred to as " treasuries. Governments may also offer inflation-protected bonds e. TIPS as well as small denomination savings bonds for ordinary investors, Agency bonds are those issued by government-affiliated organizations such as Fannie Mae or Freddie Mac.