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Credit characteristics of bonds determine its yield.bond of the state loan, russia, 1951 year image by air from Fotolia.com
Search for bonds that suit your specific investment purposes. Begin by analyzing credit strength. Investigate the revenue source for the repayment of the bond and whether that revenue source is growing. Consider the industry trends of a corporate bond. Choose safe countries for emerging market debt. Consult major credit ratings publicly available from the Internet or at public libraries. - 2). Search for bonds that have maturities that match your investment goals. Build a bond ladder to mitigate risk. Choose a maximum maturity--five years, for example--and each year, buy bonds targeted to that maturity. Each year a bond comes due, reinvest in the new target maturity. Understand that volatility is risk and laddering reduces average maturity. Laddering provides inexpensive insurance against violent interest rate moves.
- 3). Discover the extraordinary redemption, or call features of a bond. Use call information to compute the number of years until the call and at what price bonds are callable. Understand that call features are determined by the borrower. Borrowers will call bonds if interest-rates drop and they can reissue the same bonds at lower rates. Buy bonds at a discount from par for additional interest-rate protection.
- 4). Choose new-issue bonds where possible. Commissions are paid by the issuer, and the price of the bonds is the same for all investors. Avoid buying in the secondary market, as the selling broker has great latitude in pricing bonds in its inventory. Use bonds for tax swaps judiciously. Avoid commissions as much as possible, as they are high compared to stocks in the secondary market.
- 5). Consider the use of professionally managed bond funds to avoid record-keeping, credit research and the need for the brokerage account to be maintained for you. Fees run approximately 1 percent of assets annually. Invest funds that key in on a specific maturity range, credit rating or country. Buy municipal tax exempt bonds in taxable personal accounts. Buy higher-yielding taxable bond in tax exempt retirement accounts.
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