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Bond Investing

Bonds represent a safe investment, whose value may not increase as that of stocks, but this is compensated by the sufficiently lower degree of risk. Thus, if you want to set a safe-investment portfolio, you should put up with their boring nature and invest in them. 

Why individual bonds are worth the effort?

  • You can adapt a bond portfolio to efficiently meet your financial needs.
  • The bonds reach maturity exactly when you need the resources.
  • Elimination of the possibility of rising interest rates eating up your investment.

Treasury Strips Characteristics

Created by the big Wall Street bond houses, this type of bonds has interest-bearing coupons from long-term Treasury bonds. Some of the strips' characteristics are:

  • Easily tradable.
  • If held to maturity they provide guaranteed returns.
  • Zero-coupon bonds.
  • Can be purchased at a discounted face-value from a broker.
  • At maturity, the full value is paid with no interest payments during the period.
  • The minimum face-value at which you can purchase them - $5 000.

Laddered Portfolio of Strips

The elimination of risk caused by the purchase of strips with known in advance maturity date is offset by the low returns, which you may end up getting. Laddered portfolio of strips solves to a significant degree this type of problem by ensuring higher returns to your investment. It includes bonds with differing maturity dates. As a result the risk connected with the investment is reduced thanks to the bonds that will reach maturity before their need arises. Additionally, your returns on the long-term maturity bonds are sufficiently increased.

You can get laddered portfolio of strips, which includes strips with three maturities, from such big discount companies as Schwab and Fidelity. The commission of such brokers is included in the returns they state, but if you are reluctant to pay the sometimes high commission fees, you can use the services of deep-discount brokers. These ladders of three bonds eliminate the loss of money on your long-term bonds in the event of increasing interest rates by making them back from the purchase of new bonds at higher rate. This can be done by the use of the inflows from the maturing bonds.

It is true that maturity and interest rates complicate the management of individual bond investment. If you think you will not be able to cope with the peculiarities of bond management, than you should consider investment in bond funds. But you should have in mind that it will be difficult to find a portfolio that exactly matches your needs.

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