Money & Investing - Banks.com

Image via Wikipedia

Bond investors can be a nervous bunch. Many of them like the safety that bonds offer. However, one of the issues that has been nagging many bond investors has to do with yield. Yield isn’t that high right now. Bond yields may be higher than cash right now, but they are still fairly low. But, as many equity investors are quick to point out, when you take the relative safety of bonds, you are not going to see very high yields. Higher returns require higher risk. BusinessWeek makes this argument very well:

After all, reward is proportionate to the risk you take, making it infeasible for two different portfolios to carry the same amount of risk yet deliver substantially different levels of return. “It’s almost like gravity, you can’t get off it,” says Frank Armstrong, president of Investor Solutions in Coconut Grove, Fla. “Investors need to accept that we’re in a low-interest-rate environment. Anything beyond money-market funds is going to have some kind of risk they may or may not understand.”

However, there are ways to get higher yields on your bond portfolio. It does require adding a little risk, but many bond investors can handle the increase in risk — as long as it results in higher yields that are still reasonably safe.

Different types of bonds to add risk (and return) to your bond investments

Many bond investors go with short-term Treasuries. These are notes that range from a few months to 5 years. However, it is possible to increase your return by buying bonds for a longer term. Longer-term Treasuries, such as 8 year and 10 year notes, may provide better yield. But you still have to worry about the risk of rising rates at the tail end of the bond maturity.

Another option is to invest in municipal bonds. These are local government bonds that usually offer a higher return. However, these municipal bonds carry more risk, and can be volatile. But there are some that have tax advantages, and they can be helpful as part of a mutual fund.

Finally, consider corporate bonds. These are picking up, and you can get good yields as businesses try to find funding. But these are among the riskiest of bond choices right now, with so much in the business sector in turmoil.

You can also invest in bond indexes to get access to a wider variety of bonds.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions. 

Today is the observation of Memorial Day. I would like to express my gratitude for the brave men and women who work so hard and have given so much to defend our country. And, of course, it is also a worthy goal to think of those who have gone before to build our country in wars since the Revolution. (I just finished watching John Adams, so the Revolution is on my mind.) At any rate, I started thinking about war bonds recently. They were issued during the Civil War, World War I and World War II here in the U.S. Other countries have used war bonds as well. I thought that Memorial Day would be an appropriate time to take a brief look at these investments of a bygone era.

War bonds

War bonds were issued to…pay for war. Citizens were encouraged to buy war bonds to help fund expensive wars. A bond is basically a loan to the government. War bonds were offered in a number of denominations so that anyone could afford them. Wikipedia describes the denominations of war bonds during World War II, which featured an even more widespread public program than World War I (which saw mostly banks investing in war bonds):

Three new series of bond notes, Series E, F and G, would be introduced, of which Series E would be targeted at individuals as “defense bonds”. Like the baby bonds, they were sold for as little as $18.75 and matured in ten years, at which time the United States government paid the bondholder $25. Large denominations of between $50 and $1000 were also made available, all of which, unlike the Liberty Bonds of the First World War, were non-negotiable bonds. For those that found it difficult to purchase an entire bond at once, 10 cent savings stamps could be purchased and collected in Treasury approved stamp albums until the recipient had accumulated enough stamps for a bond purchase.

Now, of course, we no longer have war bonds. But ordinary citizens can still help fund government spending by purchasing U.S. Treasury Bonds  — which are available through Treasury Direct. The current way that business is done by the government precludes the need for specific bonds issued for war.

Image via Wikipedia

One of the more popular investment vehicles these days is the bond. Bonds are becoming popular because they are seen as “safe” investments. And at a time when people are concerned about preserving their capital, bonds can seem like a good idea. I agree that bonds can be a useful part of your investment portfolio, but I also think that panicking and avoiding stocks and other investments altogether is a bad idea. Try to approach asset allocation with long-term goals in mind, and use bonds as part of an overall investing strategy.

The basics of bonds: Treasury, Corporate and Municipal

When investing in bonds, it is a good idea to understand how they work. First of all, bonds represent debt. You are essentially making a loan to an entity. You will be paid a certain rate of interest for the loan, which you can collect regularly. When the term of the loan is up, you are repaid the full face value of the bond. There are three main types of bonds, and TheSUBWAY explains what they are:

Treasury bonds, also known as “T-bonds” for short, are issued by the United States government and are considered to be the safest of the three bonds.  The only risk is if they are sold prior to maturity (but this holds true for all bonds). Super-safety comes at a cost, though, and in the case of treasury bonds that means lower returns than other bonds. …

Corporate bonds are issued by companies in order to raise capital.  While they can be very safe investments when issued by strong, established companies, the reverse is true for companies that are not rock solid. Unlike treasury bonds, corporate bonds have what is known as a “call provision”, which allows the bond holder to get their principle investment back before maturity.

Most corporate bonds have fixed interest rates, and some, called “zero coupons” are sold at a significant discount in exchange for the bondholder agreeing to wait until maturity to receive interest payments. …

Municipal bonds are issued by state, county, or city governments for the purpose of financing government sponsored functions (I.E., building a highway or a school), or for other “non governmental” purposes, such as raising money for low income housing or student loans.

Municipal bonds, like T-bonds, pay interest twice a year.  These investments can be very safe, but do carry risks as well. Moody’s and Standard & Poor rate municipal bonds based on their credit quality, so when investing in them, it’s a very good idea to use these ratings as a guideline.

Depending on whether you sell in the secondary market, or whether there is a chance of default, different bonds have different risks. Carefully evaluate your situation and goals to figure out which bonds are best for your investment portfolio.

Related articles by Zemanta

• Muni Bonds Get Ahead of Themselves (businessweek.com)
• Would You Buy US Debt for Zero Return? (delawarewatch.blogspot.com)
• Basics of Treasury Bonds & Securities Explained (bargaineering.com)