7 Things to Consider When Investing in Bonds

736 Words May 3rd, 2016 3 Pages
Financial Services Investing in Bonds
Investing in bonds is a complex matter, one that involves much thought prior to dumping [usually] a large amount of money into a corporate, municipal, or government bond. There are many things to consider before you should invest in a bond: (1) risk profile and target return, (2) when is/are the maturity date(s) and do they follow your investment horizon, (3) what are the risks, (4) can the bonds be purchased back before maturity, (5) are the interest payments made at a fixed or floating rate, (6) can the issuer cover its debt obligations, (7) and lastly, how are the bonds secured. All of these should be considered before rushing into purchasing a bond of any kind.
First, before investing it is
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A fixed rate offers a set percentage of the face value, meaning that the investor will know exactly how much the coupon will pay each time until maturity, due to the fixed rate. On the other hand, a floating rate bonds have their coupon payments determined by the market. In the U.S., this is determined by the US Treasury rate, LIBOR, or prime rate/fed funds. These floating bonds are typically issued with 2-5 year maturity terms, and typically by governments, banks, and other financial institutions. In the event of a floating rate, the bond issuer should fully make aware to the buyer the method of interest. Another thing to analyze prior to investing is whether or not an issuer can cover its debt obligations. Keep in mind that bond purchasers are loaning money to the issuer, thus the purchaser should be sure that the issuer plans and is able to make good on coupon payments, as well as the principal once the bond has matured. This can be very complex, and requires monitoring on an around-the-clock basis by professionals. The use of financial metrics can make this task a little easier to forecast. Lastly, it is crucial to determine whether or not you will receive your money back, or at least part of your money, should an issuer go belly-up. Investors can determine this through the use of two figures: (1) loss given default (LGD) and (2) recovery rate. In addition, it is
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