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Bond Basics: How Do I Buy Bonds?

Most bond transactions can be completed through a full service or discount brokerage. You can also open an account with a bond broker, but be warned that most bond brokers require a minimum initial deposit of $5,000. If you cannot afford this amount, we suggest looking at a mutual fund that specializes in bonds (or a bond fund).

Some financial institutions will provide their clients with the service of transacting government securities. However, if your bank doesn't provide this service and you do not have a brokerage account, you can purchase government bonds through a government agency (this is true in most countries). In the U.S. you can buy bonds directly from the government through TreasuryDirect at http://www.treasurydirect.gov. The Bureau of the Public Debt started TreasuryDirect so that individuals could buy bonds directly from the Treasury, thereby bypassing a broker. All transactions and interest payments are done electronically.

If you do decide to purchase a bond through your broker, he or she may tell you that the trade is commission free. Don't be fooled. What typically happens is that the broker will mark up the price slightly; this markup is really the same as a commission. To make sure that you are not being taken advantage of, simply look up the latest quote for the bond and determine whether the markup is acceptable.

Remember, you should research bonds just as you would stocks. We've gone over several factors you need to consider before loaning money to a government or company, so do your homework!

Bond Basics: Conclusion

Now you know the basics of bonds. Not too complicated, is it? Here is a recap of what we discussed:

* Bonds are just like IOUs. Buying a bond means you are lending out your money.
* Bonds are also called fixed-income securities because the cash flow from them is fixed.
* Stocks are equity; bonds are debt.
* The key reason to purchase bonds is to diversify your portfolio.
* The issuers of bonds are governments and corporations.
* A bond is characterized by its face value, coupon rate, maturity and issuer.
* Yield is the rate of return you get on a bond.
* When price goes up, yield goes down, and vice versa.
* When interest rates rise, the price of bonds in the market falls, and vice versa.
* Bills, notes and bonds are all fixed-income securities classified by maturity.
* Government bonds are the safest bonds, followed by municipal bonds, and then corporate bonds.
* Bonds are not risk free. It's always possible - especially in the case of corporate bonds - for the borrower to default on the debt payments.
* High-risk/high-yield bonds are known as junk bonds.
* You can purchase most bonds through a brokerage or bank. If you are a U.S. citizen, you can buy government bonds through TreasuryDirect.
* Often, brokers will not charge a commission to buy bonds but will mark up the price instead.

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