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Bonds and Security
Bonds are loans to companies, local authorities or the government. They usually pay a fixed rate of interest each year and aim to pay back the capital at the end of a stated period. Corporate and government bonds are traded on the stockmarket, so their value can rise and fall.
Corporate Bond Investment
Corporate bonds are issued by companies as a way of raising money to invest in their business. They have nominal value (usually £100), which is the amount that will be returned to the investor on a stated future date (the redemption date). They also pay a stated interest rate each year - usually fixed. Corporate bonds are bought and sold on the stock market and their price can go up or down.
When you buy corporate bonds, you are investing your money that will be used to expand or enhance the company that issued the bond. The company promises to give back your principal amount by a set date and until then it pays you a regular interest, most often semi-annually. This interest is taxable.
- Zero coupon bonds - No periodic interest is paid on these bonds. But since they are sold at a discount and the investor gets full face value of the bond at maturity, he gets a profit.
- Convertible bonds - These bonds can be converted into other securities - the common stock of the issuing company.
- Floating rate bonds - With these bonds, the coupon rate can be changed if a commitment had been made at a lower rate whereas the present interest rates are on the rise.
- Callable corporate bond - The issuing company has the right to get back the security on a set date before maturity. This could be disadvantageous to the investor, if reinvestment is available only at a lower interest rate.
- Putable bonds -In these type of bonds the investor has the right to put the security back to the issuer and so, these are advantageous when the interest rates are rising.
- Step up bonds - Step up corporate bonds permit a fixed rate of interest until the call date, after which the coupon increases if the bond is not called.
- Step down bonds - In these type of bonds a fixed rate of interest is paid till the call date when the coupon decreases if the bond is not called.
How can Corporate Bonds be Bought?
Investments require judicious planning and decision-making that may need the services of a broker. Personal research into the different bonds and the companies offering them is very important to make an investment decision suited to your needs and circumstances. Nevertheless, you can get informed guidance on the different aspects of your investments through corporate bond brokers. There are two kinds of brokerages that will do the research work for you:
- Full service brokerages will research the markets, identify the best investment choices for your particular objective, guide you in your decision, and finish the entire transaction. Of course, the fees they charge for their services are understandably high.
- Discount brokerages offer to do research for information, but they will not guide or advise you in your decision-making. You are responsible to use the information you get to make a wise investment.
To get the assistance of a good corporate bond broker, do some initial research on which brokers are licensed by The National Association of Securities Dealers [NASD]. Being licensed by the NASD means the broker has gone through a rigorous training and evaluation as well as a screening process. The NASD website carries information on licensed brokers.
Once you have chosen your broker, a personal account will be opened for you. Also, a questionnaire that contains pertinent information about you will be filed, so that you will be guided to choose the types of investment that best fits you.
Zero Coupon Bonds Investment
Floating rate bonds
Callable corporate bond
Step up bonds
Debit Security Investment
Savings Bond Investment
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