Every diversified portfolio will included some assets in CDs, bonds, or bond funds. This page will help you learn the basics about investing in CDs, bonds, and bond funds. Contents:
Select Video Tutorials about Investing in CDs, bonds, or bond funds
Playlist for Investing In Bonds:
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All are excellent videos. The transcripts can help you make best use of your time.
Commonly asked questions about investing in bonds
Investing in Bonds:
- 1.1 What is a money market fund?
- 1.2 Are CDs better than bonds?
- 1.3 What are bonds?
- 1.4 What are bond ladders?
- 1.5 Individual bonds or bond fund?
Quick answers to common questions about investing in bonds
What is a money market fund?
Main article: Bond Basics 1: What is a money market fund? (video)
A money market fund is similar to a bank savings account except that it is not FDIC insured. It is comprised of short-term investments like Treasury Bills. But unlike Treasury bills, notes, and bonds, it is managed so that the value principal invested remains stable. A bond promises to pay a fixed interest rate, but when interest rates in the market go up the value of an bond goes down. With a money market fund, the value of your investment remains stable and the interest that it pays roughly tracks prevailing interest rates in the market.
Are CDs better than bonds?
Main article: Bond Basics 2: Are CDs better than bonds? (video)
A bank CD performs like a bond but this is not obvious to consumers because CDs cannot be traded, they can only be redeemed at the issuing bank. A FDIC-insured certificate of deposit is comparable to a Treasury with the same duration. Sometimes you can find CDs with very attractive rates. In these cases they can be better than CDs.
What are bonds?
Main article: Bond Basics 3: What are bonds? (video)
A bond is a simple loan that can be bought or sold. You loan your money in exchange for a promise to pay specified interest payments and to return the loaned amount on specified date in the future. There is the risk that the money won’t be paid back. That makes Treasuries, money you loan to the U.S. government, the safest credit risk. Companies use bonds as a way of raising money, an alternative of selling ownership as stock (or, equities). Higher interest payments are offered to attract investors. These high yield corporate bonds are risky and also called junk bonds.
What are bond ladders?
Main article: Bond Basics 4: What Are Bond Ladders? (video)
A bond has a maturity date that specifies when the invested principal will be returned. A ladder is simply a collection of bonds with maturities spread over time. For instance, you could create a bond ladder if you bought a 10-year Treasury bond every year. Beginning the tenth year, one would mature each year and the proceeds could be reinvested. This would be called a recurring bond ladder. A recurring bond ladder is also like a bond fund with the same duration. You could also design a non-recurring bond ladder to match the maturing bonds with your cash needs.
Individual bonds or bond fund?
Main article: Bond Basics 5: Individual bonds or bond fund? (video)
There is much misunderstanding about this topic. The short answer is that a bond fund is no different than a collection of individual bonds. The important point is cost. Very often it is more convenient and relatively inexpensive to buy a bond fund and brokers earn money (hidden costs) selling individual bonds. But savvy investors can buy CDs, Treasury bonds, and TIPS on their own without paying any commissions and eliminate annual expenses completely.
The misunderstanding generally involves the perception that individual bonds are safer than bond funds because you get your invested principal back when they mature. This is an incorrect. It is an incorrect understanding of bond risk and a need to learn about bond duration.