Understanding the basics when it comes to investing in bonds is essential to keep the risk low while still allowing for the investment to be profitable. Bonds are simply an investment with a public company, institution or governmental agency that offers a return on your investment in the form of interest earnings. Bonds are usually issued to fund large projects or to raise capital to cover immediate needs through what is known as a bond measure. Most popular among investors are the tax free municipal bond funds, followed closely by investment grade bonds.
The attractive features of tax free muni bond funds are numerous, with the most obvious being that the earnings are exempt from federal income tax and in some cases, are exempt from state tax as well. Certain restrictions may apply to the taxability and it is the investors responsibility to fully investigate the funds to ensure that it meets all necessary criteria for tax exemption. The security of these bond funds is generally high and most investors feel that the lower risk makes the lower rate of interest worthwhile.
Investment grade bonds are rated based on the creditworthiness of the bond issuer and they are graded by Standard Poors and Moodys. To qualify as an investment grade bond, the bond must be rated no lower than BBB (or Baa3 for Moodys). The investor must consider that circumstances can arise that will lower the rating of the investment bond and government issued bonds are considered less risky investments. The investment bond grade allows the investor to make an informed decision regarding the risk of investment.
Bond repayment schedules vary based on the type and terms of the bond or bond funds. Another consideration for investors would be that bonds and bond funds generally require a minimum investment of 5000 and have some fees associated with the purchase.