J ThompsonFiguring out how to invest in bonds? With a recession potentially on the way, some investors are researching how to buy high yield bonds as a way of diversifying their portfolio.
Below we review the best way to invest in bonds depending on your investment goals. We look at how to invest in a bond individually. We look at how to spread risk by buying many bonds at once as part of a bond Exchange-Traded Fund (ETF). And overall we outline what types of bond exist as well as what pros and cons they offer.
How to Invest in Bonds – 5 Easy Steps
One easy way to invest in bonds is to buy into a bond ETF. Or investors can drill down and pick their own bonds individually. Either way, buying bonds generally takes just 5 simple steps:
- ✅Step 1: Open an account with your preferred broker – Head to the online platform of your preferred broker. To get started, input some straightforward personal details.
- 🔑Step 2: Verification – All regulated brokers must insist by law that investors verify their ID. This is to keep everybody safe from fraud. Provide some proof of ID and address as requested onscreen.
- 💳 Step 3: Deposit – With Interactive Broker, for example, investors may deposit funds into their account via ACH, bank transfer or cheque.
- 🔎 Step 4: Search for bonds – Interactive Broker provides a Bond Search Tool. This is just as well, given there are over 1m bonds on offer! Searching for bond ETFs is easier, as there are far less to choose from.
- 🛒 Step 5: Buy bonds – Before an investor buys any asset, it is important to talk to a professional first. Speak to an Independent Financial Adviser (IFA) or tax professional. When ready, execute your trade onscreen. Usually your broker will be happy to store your asset and, in the future, potentially buy it back.
Where to Invest in Bonds in 2023
Many full-service brokers (Capital.com and eToro being examples) offer bonds as part of Exchange-Traded Funds (ETFs). We look at a few bond ETFs below, as they offer a convenient way to gain exposure to many bonds at once.
But, first, we review one global broker based in the US which offers individual bonds. Buying individual bonds means investors can really focus on achieving their investment goals exactly.
1. Interactive Brokers – Full-service Broker Offering Bond Investing
IBKR is the broker wing of Interactive Brokers Group. The firm is listed on the NASDAQ and handles 2.17m trades every day. Founded in 1977, Interactive Brokers is headquartered in Greenwich, Connecticut, US and employs over 2.5k staff across 14 countries.
IBRK has investors covered whether they want to invest in stocks, commodities, options, futures, currencies, mutual funds, ETFs and, of course, bonds. (Contracts-For-Difference are also offered).
With IBKR’s Bond Search Tool, investors can search over 1m bonds globally and compare yields on:
- 26k corporate bonds
- 1m+ municipal securities
- 21k certificates of deposit and non US-sovereign bonds
- A full selection of US government securities
The broker charges no mark-ups or spreads on bonds, but does offer a commissions system. Commission depends on the type of bond and how much is being traded, with minimum commissions of $5 on Treasury Bonds, and $1 on corporate and municipal bonds.
Importantly, investors with IBKR can rest assured that this outfit is properly regulated. In the US, regulation is covered by FINRA, NYSE, and the SEC. In the UK, the FCA oversees operations.
| Approx Number of Bonds | 1m |
| Pricing System | Commission only: no spreads or mark-ups |
| Payment Methods | US: ACH, bank wire, online bill pay or paper cheque |
| Non-Trading Fees |
No inactivity fees or account minimums for individual accounts |
Pros
Cons Investing in bonds works initially in the same way as investing in stocks. The investor must: Then the broker will usually be happy to hold onto the bond on behalf of the investor. The investor will then receive coupon payments (the 'nominal yield') from the bond at regular intervals. These will be paid into their brokerage account (or re-invested automatically, depending on the type of bond). Bonds are essentially IOUs offered by governments, municipalities and corporations. Simply put, the idea is that the issuer needs to raise some money. The investor agrees to pay the issuer some money right now. In return, the investor receives a bond from the issuer to pay regular interest payments on the money lent - as well to pay back the bond's face value when it reaches maturity. Traders and investors looking for the most popular value investing assets sometimes prefer to steer clear of bonds and commodities. Risk is a key determinant of the price and yield of bonds. Bonds are rated accorded to two types of risk: This is the risk that the bond issuer will default on the yield payments. The higher the risk, the worse the risk rating and the higher the yield offered by the bond. Bonds are given a credit risk rating by a credit ratings agency like Moody's or Standard & Poor's. This is the risk that interest rates will rise and make the bond less valuable. How does this work? Well, when a new bond comes onto the market, its nominal yield - ie. the amount it will pay out over time - is determined by current interest rates. So, if interest rates are high, new bonds will reflect that and offer high yields for the future. The result of this is that existing bonds on the market offering lower yields will be, naturally, worth less. The first issue with finding suitable individual bonds is finding a suitable bond broker. US investors can use an authorized search page to find brokers regulated by the influential Financial Industry Regulatory Authority (FINRA). Investors can enter the name of any broker and see whether it has FINRA's backing. It is always sensible to invest with a regulated broker. From the image below we can see, for example, that Interactive Brokers (reviewed above) is authorized by FINRA. Many popular online brokers offer bond ETFs. These are often index funds - shares of which the investor may trade freely as if they were company shares. There are three main types of bond: Sovereign governments issue debt-based assets of varying types. The US Government, for example, is responsible for issuing $23 trillion of: US Treasury bonds are exempt from federal taxation, but subject to state taxation. Their returns generally are not as high as for corporate bonds. But they are less risky. 'I Bonds' are a form of US Treasury bond we look into below. Like TIPS (Treasury Inflation-Protected Securities), I Bonds offer protection against inflation. They are therefore very popular. Professional investors would say that perhaps the best place to buy municipal bonds is with a bond broker. Although municipal bonds are issued by individual US states, they cannot be bought directly from states. Corporate bonds offer the highest level of risk but also the highest potential returns. When a company needs to raise money, it may have the authority to issue bonds. The question all investors must answer is: can the company be trusted to make good on the coupon payments? Usually the highest yields on the market are offered by companies with a high risk of credit default; there is no such thing as a free lunch. Top fund provider Vanguard reports that default rates currently stand at around 1% for high-yield corporate bonds - 'well below the historical average of 3.5%'. Bond funds are either mutual funds or ETFs which invest wholly, or partly, in bonds. Some track influential bond indices, like the Bloomberg Municipal Bond Index, which offered a tax-adjusted yield of 5.42% in mid-2022 as well as a AA/AA- rating; an attractive combination. Investors can buy shares in ETFs with full-service brokers. Capital.com, eToro and Interactive Brokers are examples which investors might research for themselves. I Bonds are issued by the US Treasury. Their interest rate is set to beat inflation estimates. I Bonds are available direct from the US Government's TreasuryDirect website. I Bonds are similar to TIPS (Treasury Inflation-Protected Securities). The difference is in the nature of the inflation protection: As we can confirm from the chart below, the price of this bond has suffered in recent years along with the rest of the international bond market. Currently it is valued at just over £100. The coupon rate offered is 5.75%. Distributions are paid twice a year. The bond comes to maturity in December 2032, having been released in December 1999 as part of a total £400m issuance. The 3i Group is part of the FTSE 100 Index. This bond is therefore not considered as a major default risk - but investors should always do their homework on corporate bond providers, as well as consult their Independent Financial Advisor before purchase. This bond is a type of US Treasury bond called a TIPS. TIPS stands for Treasury Inflation-Protected Security. With TIPS, the price of the bond is adjusted at issuance to aim to stay ahead of inflation. With I Bonds, it is the interest rate which is adjusted. Bonds like this one with a maturity of over 20 years is called a 'T Bond'. The coupon rate of the 30 Year TIPs is 0.125%. This means that, at issuance, the bond was configured to pay 0.125% interest over the course of its life. This low interest rate is not unusual for T Bonds, because of the supreme credit rating of the US Government. Investors can be sure, in other words, that they will receive their payments - so they are expected to accept lower yields. Below we can see a chart showing the yield of 30 Year TIPs since 2000. A convenient way to buy into TIPS like this one is to buy into a mutual fund or ETF that features them - as well as many other bonds. 2,369 bonds are covered in all, with a total worth of $11bn. A full range of credit risk is covered too: As a passively-managed ETF, this fund offers a low Expense Ratio of 0.07%. It is a cheap fund to run because it tracks a bond index: the (very wordy) Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged). Investors should be clear: this broad-based ETF tracks only government and corporate bonds which are issued outside of the US. Many ETFs on the other hand focus only on US Treasury bonds, such as the iShares 7-10 Year Treasury Bond ETF. BDNX holds 6728 bonds with an average yield to maturity of 3.67% and an average maturity of 9.3 years. The fund offers a current yield of just 2.13%. Distributions are paid monthly. Bonds are traditionally used as a 'contrarian' asset. This means that their value sometimes does the opposite of conventional stocks - which means bonds are used to hedge risk. Bonds offer two forms of potential income: If a regular fixed income combined with low risk is part of your investment strategy, bonds are ideal. Bonds are taxed when a) they are sold for a capital gain and/or b) interest payments are received. Tax information on bonds and other investments is available online direct from the IRS. In countries other than the US, regimes vary. But, as with other investment assets, the (very) general rule of thumb is that both capital gains and interest payments will be subject to taxation. Always consult with a tax professional before investing in bonds. When it comes to capital growth, few assets can compete with crypto as long-term investments (and short-term). And crypto offer the most potential for profit when they are in their presale phase. 'Presale' means that a crypto has yet to be listed with one of the popular altcoin exchanges in its Initial Coin Offering (ICO). Available right now as one of the best crypto presales is one of the most promising cryptos: Tamadoge (TAMA). Remember Dogecoin, the doggy meme crypto that took 2021 by storm? And Shiba Inu (SHIB) which followed? Tamadoge is billed as the next crypto to take up the doggy theme and rock the markets. And that is because TAMA is more than just one of the best meme coins. Tamadoge matches the cutesy appeal of canine meme crypto with real utility - it is set to be one of the best video game cryptos and meme coin rolled into one. 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Above we have aimed to provide a beginner's guide to investing in bonds. Despite their poor performance over recent years, bonds are always worth looking at as a way of diversifying an investment portfolio. And the same can be said of the best emerging cryptos. Crypto are at the opposite end of the risk/reward spectrum than bonds. So sensible investors only commit 1-5% of their portfolio to crypto. If high growth potential is the objective, then a presale crypto like Tamadoge is particularly attractive, as it could well be one of the next crypto to explode. Just be sure to only commit what you can afford to lose with any financial asset! Tamadoge - The Play to Earn Dogecoin This article was written for Business 2 Community by J Thompson.
How Does Investing in Bonds Work?
How Do Bonds Work?
1) Credit Risk
2) Interest Rate Risk
How to Find the Best Bonds to Invest in
What Types of Bond Are There?
1) How to Invest in Government Bonds
How to Invest in 'I Bonds'
2) How to Invest in Municipal Bonds
3) How to Invest in Corporate Bonds
How to Invest in Bond Funds
5 Popular Bonds to Invest in Right Now
1. I Bonds
2. 3i Group Medium Term Notes 1999
This individual corporate bond is offered by the multinational investment company 3i Group, based in London.
3. US 30 Year TIPS
4. JP Morgan Income Fund (JGIAX)
Issued by US investment bank JP Morgan as a form of mutual fund, JGIAX invests only in bonds. A bond mutual fund is one way of getting exposure to many bonds at once - and taking the headache out of individual bond selection.
5. Vanguard Total International Bond Index Fund ETF (BDNX)
Are Bonds a Good Investment?
Should I Invest in Bonds?
Fixed Income
Sales Value
How are Bonds Taxed?
Bonds vs Presale Cryptos - Which is the Better Investment in 2023?
Bonds are a very particular type of asset. They focus on fixed income over the long-term, with some resale value. If an investor wants to grow a pile of money (capital growth), bonds are not necessarily the best choice.
Min Investment
1,000 TAMA (∼$10+ gas fee)
Max Investment
NA
Purchase Methods
ETH or USDT now; fiat currency soon
Blockchain
Ethereum (ERC-20 token)
Presale Ends
Q4 2022
Conclusion
FAQs
Are i-Bonds a good investment?
How much money do you need to invest in a bond?
Can you buy bonds through a broker?
Which investment bonds are best?
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