How do you search, evaluate and buy individual bonds? I about a bond once from a bank decades ago.Why types of bonds are preferable? I heard Warren Buffett had his money in Treasuries. I went to Treasury Direct and I see many kinds. How do I choose?Suze Orman mentioned munis are a good buy now. She mentioned to buy and individual bond instead of a bond fund.So...how do I do it?
I think you will find answers to your questions and a lot more in the FAQ on this board. Click on line one of the sidebar at the right.Bonds usually are sold by bond rating and maturity. Bonds rated AAA down to BBB are considered investment grade. Below that are junk bonds. Most investers will be comfortable with bonds rated AA or A, but some will mix in some lower rated bonds in a diversified portfolio usually for higher yield (if you choose them carefully).Interest rates go up with increasing risk. So low rated bonds, less likely to be able to refund your money at maturity pay higher interest. Similarly longer bonds pay higher interest most of the time. The relationship of maturity in the current market is usually expressed in the yield curve of Treasury bonds. Punch yield curve into Google for a look at the current yield curve. Treasury bonds are as safe of the US govt, higher than the highest corporate bonds. So all other corporate bonds should pay higher interest. Bonds are priced by their differential from the treasury yield curve.Short bonds, less than 2 yrs or less maturity, pay the lowest interest. Very long bonds, 30 yrs or more, are out of reach for most individuals. So most individuals would want to buy bonds that mature in 7 to 15 yrs. A bond ladder with bonds maturing at regular intervals is considered one of the most conservative bond investment strategies. By living off the interest and reinvesting in a new longest bond as each one mature, your portfolio pays average market rates and changes only gradually with interest rates.Most individual investors may buy their bonds from a broker or discount broker. But local muni bonds are also available from the trust department of your bank. Most individuals must plan to hold bonds to maturity. Bonds can be sold but usually only to a bond dealer through your broker at whatever price he offers. That makes them costly to trade. But at maturity you still get full face value back.If you are in high tax brackets muni bonds which are free of fed taxes can be a better deal than corporate bonds. Most calculate the differential based on their marginal income tax rate to decide. But not that double tax free (free of state income taxes too in the state where issued) and triple (also free of local taxes) are also out there in some localities, especially NYC.To answer your questions--"How do you search, evaluate and buy individual bonds?" Decide what maturity and bond rating you want to buy. Your broker will have a list of bonds in inventory he can offer you. He will give you a price. You pay no commission on new issue bonds."Why types of bonds are preferable?" How is your risk tolerance? Treasuries are best if you can tolerate no risk. But taking more risk will get you better yields. Investment grade bonds are usually OK.Muni bonds can be especially attractive because they are paying remarkably high yields due to panic selling. If that works for you, go for it. But note there have been some problems with bond insurance that makes some people nervous. But defaults are rare among investment grade bonds.
How do you search, evaluate and buy individual bonds? I about a bond once from a bank decades ago.Why types of bonds are preferable? I heard Warren Buffett had his money in Treasuries. I went to Treasury Direct and I see many kinds. How do I choose?Suze Orman mentioned munis are a good buy now. She mentioned to buy and individual bond instead of a bond fund.So...how do I do it?As Paul said, look at the FAQs. It is especially important to know that CDs are a good alternative to bonds, even though the talking heads on TV rarely mention this.A simple version: there are different types of bonds and there are different maturities for bonds. Maturities means how long until the bond matures and your principal is returned to you (assuming the bond doesn't default of get called). A 5-year CD returns your principal in 5 years. A 5-year Treasury Note with a maturity date of April 2013 will return your principal in April 2013, even if you buy it today—5 years in this case is from the date the Treasury Note was initially offered.Treasuries of different sorts are generally considered safe, as are insured CDs (assuming US government doesn't go bankrupt one of these days). In addition to Treasury Bills (short maturities), Notes (intermediate maturities) and Bonds (long maturities), the Treasury offers TIPS of different maturities. TIPS provide a fixed interest component, which is lower than for regular Treasuries or CDs, but they also adjust for inflation. What we pay attention to is the fixed rate on TIPS. Historically, about 2.7% above inflation has been the average, but in recent years it has been much less. Currently TIPS are the highest they have been in 7 or 8 years.Corporate and Municipal bonds are rated according to default risk. Ratings may not be accurate. It is certainly likely that both corporate and muni bonds right now being undervalued by the market (meaning you can get a good yield/interest rate), which is what Suzie Orman thinks. But it is possible the economy is in as bad shape or worse than the market is pricing in, so there are definite risks in trying to find which corporate or muni bonds are good reward/risk choices. This may actually be one of the rare occasions where a corporate or muni bond fund may be a good way to take advantage of bonds being undervalued, so you get diversification. But you need to be sure you get something relatively conservative—I like Vanguard in this regard (Intermediate Investment Grade Bond Fund, for example).
Thanks for the replies. You guys have been very helpful.Another question. What bond dividends are tax free? Regarding Treasuries, are the dividends exempt from federal and state taxes? Munis?
hat bond dividends are tax free? Regarding Treasuries, are the dividends exempt from federal and state taxes? Munis?Municipal bonds are exempt from both federal taxes and from taxes in the state they are issued from. (This is why you see state specific muni bond funds for states with high state income taxes, such as California.)Treasuries and TIPS are exempt from state taxes, but you pay federal taxes. (This means when you compare yields between Treasuries/TIPS and corporates/CDs,you need to factor in state taxes.)Of course, in tax-deferred accounts, as with stocks, you will pay taxes at your marginal rate at the time of withdrawal, so tax exemptions for munis and Treasuries are irrelevant.Usually (right now everything is very weird), you can find government insured CDs with enough higher yields than Treasuries of the same maturity to make up the difference of state taxes, even if you live in a high tax state. The disadvantage is you need to shop around, since the same bank/credit union doesn't always have the highest CD yield. Brokerages, such as Vanguard, offer FDIC brokered CDs, usually with competitive yields (close to high end), but at least Vanguard has $10,000 minimums on brokered CDs (banks and credit unions vary with minimums, but some are as low as $500). Also, most brokered CDs, like bonds, pay out the dividends semi-annually, so you then have to do something with the money—less of an issue when you start living off you income after retirement than when you are still accumulating. Many of us have opened accounts at the Pentagon Federal Credit Union, because it has pretty regularly had competitive rates, sometimes what we call "fire sales."If you buy Treasuries or TIPS through Treasury direct, you can get them in $1000 increments for no commission at auctions. TIPS may end up paying less than CDs, but there's the x-factor of inflation (CPI-U adjustment) so you don't know in advance, as you do with Treasuries. So, we use historical numbers as the best guide we have (fixed yield above inflation). Right now TIPS look much better than Treasuries based on history, although the professional traders are assuming deflation, which will probably be correct for the next year or two.Typically, muni bonds have been a better choice for people in the top two federal tax brackets, maybe top three if you are in a high tax state and get state specific munis. Munis have historically been at less of a default risk than corporate bonds with the same rating. Again, right now everything is out of whack and both munis and corporates have yields well above normal compared to Treasuries, because of default fears. Either there are some excellent bargains out there or the fears are real and there will be many defaults even of high rated bonds.The starting point for any decisions is to weigh your return needs versus risks. I figure how much of a return above inflation I will need after retirement to stay solvent until age 100 (with a healthy room for error—I assume zero for social security, although it theoretically ought to provide something like 50% of expenses). Bottom line is that if you save enough, you can get away with more conservative choices.
Bonds pay interest, not dividends and they are fully taxable as ordinary income.Government bonds like Treasuries are free of state and local income taxes but interest is taxed by the Feds at ordinary income tax rates.Muni bonds are free of federal taxes but usually taxable state and locally. However, double tax free bonds, free of state income taxes in the state where issued (ie you have to buy one issued in the state where you live) are available in some state. Double tax free munibond funds are available in many states.Triple tax free bond funds (from of fed, state, and local income taxes) are available in a few areas, typically New York City.
All true, but to complicate it further, some muni bonds are exempt from all three but ARE taxable for AMT purposes, depending on how they are exempt.Hockeypop
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