Before you start investing in bonds you must first understand about them. Not understanding these things may cause you to purchase the wrong bonds, at the wrong maturity date.

The par value, maturity date, and coupon rate are the 3 most important things to consider when purchasing a bond.

Referring to the amount of money you’ll receive when the bond reaches its maturity date is the par value of a bond. When the bond reaches maturity, you will receive your initial investment back.

The maturity date is of course the date that the bond will reach its full value. On this date, you will receive your initial investment, plus the interest that your money has earned.

Bonds that can be ‘called’ before reaching their maturity are Corporate, State, and Government bonds and the issuing Government or corporation will return your initial investment together with the interest it has earned so far. However, bonds that can’t be ‘called’ are Federal bonds.

When the bond reaches maturity, the coupon rate is the interest you’ll receive. To find out what the interest will be, you need to use other information since the number is written as a percentage. If the bond has a par value of $2000 and a coupon rate of 5%, then it would earn $100 per year until it reaches maturity.

Banks don’t issue bonds so many people don’t understand ho to go about buying one. There are two ways you can do this.

The purchase can be made for you by a broker or brokerage firm or go directly to the Government. Using a brokerage means that it’s likely for you to be charged with a commission fee. Shop around for the lowest commissions if you want to use a broker.

When you purchase directly through the Government, it’s not as hard as before. A program called Treasury Direct will allow you to purchase bonds and they will be held in one account for easy access. This will allow you to avoid using a broker or brokerage firm.

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