How to Buy Bonds

Types of Bonds

There are different types of bonds, and it is important to know the difference. I will explore them below.

Premium Bonds

A premium bond is a “lottery bond” and is issued by the National Savings and Investments agency (NSI) in the United Kingdom. Your premium bonds are entered into a monthly price draw. As of December 2017, the UK government paid a 1.40% annual coupon rate to compliment the lottery.

The prizes range of range from £25 to £1,000,000 ($US31.83 to $US1,273,002). Generally, there were only two winners of the $US1,273,002 payout each month.

You can purchase premium bonds at any time throughout the month; however, you are not entered into the monthly lottery until the start of the next calendar month.

Premium bonds were introduced in the late 1950's to control inflation and encourage saving.

Savings/Municipal/Treasury Bonds

Municipal and savings bonds are slightly different, although I created the title for the sake of simplicity. Savings bond refer to US bonds and municipal bonds relate to any country.

Savings bonds are issued by the United States government and they are some of the safest bonds you can buy. They are backed by the US government, and how likely is it that the US government won't be able to pay you back?

The minimum investment of $US25 makes them attractive for people looking to start saving without a huge commitment. Regarding savings bonds, there are two types, EE and I, as I will explain further below.

Series EE Bonds

Series EE bonds are non-marketable, meaning they cannot be traded on a secondary market such as the NASDAQ or NYSE. Series EE bonds are fixed interest. The US government guarantees that your investment will double in value over the term, which is typically 20 years. Interest earned from EE bonds are exempt from local and state taxes until the bond is cashed.

You can buy a maximum of $US10,000 worth of Series EE bonds per year, with room for an extra $US5,000 investment by using your income tax reform to your advantage.

Series I Bonds

Series I bonds are also non-marketable. They have fixed and variable rate factors. The fixed rate is set on the purchase date, while the variable rate is adjusted every six months based on inflation. The minimum purchase of Series I & EE bonds is $US25.

Corporate Bonds

A corporate bond functions much like the bonds mentioned previously; however, a corporate bond is a way for a company to raise money, as opposed to a government. Corporate bonds provide regular payments which are based on a fixed or variable interest rate. These coupon payments made out regularly are often backed by a company's physical assets, but generally rely on cashflow.

Corporate bonds present a higher level of risk when compared to government bonds. The companies issuing these bonds may be private or public, and different levels of financial stress will affect the level of risk involved with this bond.

It is important that you research the company under consideration before you place your money in their hands.

Junk Bonds

Junk, or high yield bonds are typically issued by entities with a low credit rating, giving them no other option than to pay an inflated interest rate. These bonds are typically risky and are best suited towards people with a high tolerance for risk.