With interest rates falling along with the stock market, bonds haven’t exactly been a safe haven for investors.
Money and real estate expert Ilyce Glink is here to explain what you need to know about investing in bonds in a volatile economy.
When a company or the U.S. government needs cash, it will offer to pay you interest if you loan them the money. Sound like a mortgage? That is, in essence, what a bond is.
A municipal bond means that a city, town, or state needs cash, usually to build a school or a bridge, or some other municipal project. You lend the municipality enough to build their school or hospital, and it pays you interest, which may be state or federal tax free. A corporate bond means you’ve lent money to a corporation, and that bond typically pays a higher rate of interest, though it’s riskier. A government bond is issued by the Treasury department, and it’s virtually risk-free.
That’s because Uncle Sam has never defaulted on a bond. But the big news in U.S. treasuries is that 10 days ago . . . the Government announced it would no longer issue 30-year bonds. That spurred interest in the 10-year note, which, as we’ve talked about before, is the benchmark for most mortgages. Greenspan is hoping that by increasing interest in the 10-year note, mortgage rates will fall. And in fact, that’s happening. Congress is debating whether or not to bring back war bonds to help finance the war on terrorism.
But are war bonds good for your wallet? World War two Bonds paid less than 3 percent. If you bought a bond for $18.75, you got $25 10 years later. Of course, buying bonds during World War two was considered a patriotic duty.
In the meantime, buying any government bond helps the U.S. government, so buying I-bonds, the inflation based bond, which pay nearly twice as much as World War II war bonds paid, might fulfill our patriotic duty without leaving you feeling the pinch. Whatever bonds you buy, just be sure you know exactly how much the bond pays and how risky it is before you write the check.
You can buy corporate or municipal bonds through a broker, who prices the bond based on the interest rate of the day and the demand for the bond. Or, you can go online to the U.S.
Government’s public www.debt.gov site and purchase government bonds directly. I’ll put a couple of good sites for bond basics, like www.bondresources.com, up on www.ThinkGlink.com.
www.treasurydirect.gov (The Federal Government’s website to buy government-issued bonds).