Individuals can invest in individual bonds or bond funds. When purchasing individual bonds, it is important to know whether the bond is being purchased as a new issue or in a secondary market. When a bond is purchased as a new issue the bond price is set at 100 and the purchaser pays the face amount of the bond plus any fees and/or commissions that are due.
When a bond is purchased in a secondary market, the bond price will fluctuate and be based on a number of factors including current interest rates, bond rating, timing of the purchase relative to where the bond is at given its interest payment period and where the bond stands relative to maturity or any call dates.
The purchase price of a bond purchased in a secondary market will also be subject to commissions and/or fees. The purchaser must evaluate these factors and determine if the purchase of a bond in a secondary market is worth the cost.
When investing in Bonds, it is important to understand what kind of account is being utilized in purchasing Bonds. For example, if you are purchasing Bonds in a managed account, that is an account that is being managed by a professional money manager or broker, make sure you understand the fee structure under which the account operates. In some situations, professional managed accounts are charging a fee that is based on a percent of assets under management. If Bonds are being purchased that are in a Bond Fund, then the fund is also assessing fees. If your portfolio includes a Bond Fund, you would probably be best served by contacting a Mutual Fund Company and opening a Bond Account directly with the Mutual Fund Company and thus minimizing the fees paid.
Commissions on individual bond purchases are usually fairly low and might vary from one half to one percent of the price of a bond. Since individual bonds that are purchased require little maintenance, there really isn't much need to be paying an annual management fee on individual bonds and would probably be better if you paid commissions on bond purchases.
If your income needs require you to draw from bond interest and you are investing in a Bond Fund, make sure the company you are investing with understands your objective and can accommodate your income needs. Most Bond Funds are geared towards re-investment and only make payments to you when you make a specific request to receive income.
Finally, pay particular attention to the taxation consequences when investing in any Bond or Bond Fund. In some cases, bond interest may be excluded from taxes. In other cases, income is taxed as ordinary income. If your state has a state income tax, then your bond income may be subject to state income tax in addition to federal income tax. Additionally, selling an individual bond before maturity may give rise to gains or losses depending on the price at which you sell the bond. If your investment is in a Bond Fund, you will be notified by the Fund company periodically regarding any taxable issues associated with your investments.
Copyright 2004, Frank Jersey
Mr. Jersey has over thirty years experience in the Financial Services Industry. For more information and opportunities, visit
http://www.someonesgottadoit.com
