How to Buy Bonds in 5 Steps

If the terms “bond,” “interest rate,” and “maturity” sound like jumbled puzzle pieces to you, don’t worry; you’re not alone. Understanding these terms can seem intimidating, but we’re here to untangle the threads and guide you through the fascinating realm of bonds. If you’re seeking a relatively safe haven for your hard-earned money, bonds could be a prudent investment choice and a compliment to your stock investments.

You may ask questions like: How do bonds differ from stocks, and why might you consider them? What are the various types of bonds available, and how do you pick those that are appropriate for you? How do fluctuations in interest rates affect your bond investment, and how risky are bonds?

In this article, we’ll answer all of your questions by covering the following: 

• What a bond is
• Different types of bonds
• Where to buy bonds
• How to buy bonds
• How interest rate can affect bonds
• Diversifying your portfolio
• Bond FAQs

What exactly is a bond?

Imagine you’re lending money to a friend, but instead of paying you back with a favor or just a ‘thank you,’ they agree to return your money with interest. Well, that’s, in simple terms, how a bond works, except your friend is now a company or even a government entity.

Key points about bonds:

• A bond is essentially a loan you provide to a company or government in exchange for interest payments.
• You, the investor, buy the bond and become a creditor to the issuer, the company, or the government.
• The bond’s interest rate is also known as a coupon rate, and it’s usually fixed when the bond is issued. However, as interest rates rise, the price of fixed-rate bonds can fall. (We’ll cover this more later!)
• Bonds are commonly safer than stocks because they offer more predictable returns.

What are the different types of bonds?

There are various types of bonds available for you to choose from. The bond world offers diversity to suit your preferences and cater to your personal risk tolerance. Some of the various types of bonds include:

• Government bonds: Issued by the government, these bonds are often considered very safe because governments have the power to tax and print money. Treasury bonds, EE bonds, I bonds, notes, and bills fall into this category.
• Corporate bonds: Companies issue these bonds to raise money for various projects. The risk associated with corporate bonds varies depending on the company’s financial health.
• Municipal bonds: Issued by local governments or municipalities, these bonds fund public projects like schools and roads and are perfect for risk-averse investors. They can offer tax advantages to investors.
• High-yield bonds: High-yield bonds are also known as junk bonds and come with higher risk but potentially higher returns. They’re usually issued at higher interest rates to entice investors.
• Zero-coupon bonds: These bonds don’t pay regular interest but are sold at a discount to their face value. When they mature, you get back the full face value.

Where to buy bonds

Bonds can be crucial in enhancing your financial stability when building a solid and diversified investment portfolio. So, where can you buy bonds? There are a few avenues to consider:

• Government agencies: One common option is to purchase bonds directly from government agencies. For example, you can buy U.S. Treasury bonds in the United States through the TreasuryDirect website. These bonds are typically among the safest investments because the full faith and credit of the government back them. If buying direct, be sure to review any applicable required holding periods, and minimum or maximum investment amounts before making a purchase.
• Brokerage firms: Many brokerage firms offer a wide range of bonds for purchase. Here, you’ll find government bonds, corporate bonds, and municipal bonds. Corporations issue bonds to raise funds for various purposes, while municipalities issue bonds to finance local projects like schools and infrastructure.
• Bond funds and ETFs: If you’re seeking a more diversified approach, consider investing in bond funds or exchange-traded funds (ETFs). Bond ETFs track the performance of a specific bond index or a group of bonds, giving investors a convenient and efficient way to gain exposure to a diversified portfolio of bonds without directly owning the individual bonds.
• Online platforms: With the rise of online investing, there are platforms that allow you to buy bonds directly. Investment platforms, like Stash, often provide a user-friendly interface and access to a wide range of bond funds and ETFs, making it easier for investors to research and select bonds that align with their investment goals.

How to buy bonds: your step-by-step guide

1. Determine your goals

Why are you interested in buying bonds? Do you want a reliable income to support your goals, or are you aiming to increase your investment over the years? Your financial goals are your guide in this adventure. 

Whether it’s saving for education, purchasing a home, or creating a financial cushion, clearly state your aims. Your goals will influence the kind of bonds you pick and the approaches you use.

2. Choose your bonds

Research is your compass here. Start by exploring bonds offered by government agencies, banks, brokers, or online platforms. Delve into the specifics of each bond – its maturity date, coupon rate, and issuer’s reputation. 

Keep an eye on the credit rating, indicating the issuer’s ability to honor its obligations. Consider the yield – the interest you’ll receive – and weigh it against the risk you’re willing to take.

3. Consider bond funds

Bond funds are a collection of various bonds pooled together by professional fund managers, offering investors a diversified portfolio in a single investment vehicle. This diversification spreads risk across multiple bonds and can potentially yield more stable returns compared to a single bond.

Unlike individual bonds, which have a fixed maturity date and provide regular interest payments, bond funds do not have a fixed maturity date and typically distribute interest as dividends. This characteristic grants investors flexibility in terms of liquidity, as they can buy or sell shares of the fund at any time, unlike traditional bonds that mature on a set date. 

Consider your risk tolerance, investment horizon, and financial aspirations when picking a bond fund that aligns seamlessly with your goals.

4. Place your order

Once you’ve selected a bond, determine the appropriate purchase method. Bonds can be bought through brokerage accounts, financial institutions, or directly from issuers. Consider factors like transaction fees, available support, and ease of management.

Before making a purchase, carefully review the bond’s prospectus or offering statement. This document outlines key details such as interest rates, maturity date, and any associated risks. Calculate the potential yield and return on investment to ensure alignment with your financial objectives.

5. Monitor your investment

If you’ve chosen individual bonds, keep a watchful eye on their performance. Track interest payments, and stay attuned to any market fluctuations. Monitor the overall fund performance and ensure it remains aligned with your goals.

How do interest rates affect bonds?

Now, the interest rate on a bond plays a crucial role in your investment. It determines the income you’ll receive, usually paid semiannually. But here’s the twist: as interest rates change in the broader market, the value of your bond can fluctuate. If market rates rise, your fixed-rate bond might seem less attractive to new investors, potentially lowering its resale value.

Imagine you bought a bond at a fixed interest rate of 3%. Now, if newer bonds are being issued with a higher interest rate of 4%, your bond isn’t as attractive to investors anymore. So, to make your bond more appealing, its price drops. This way, your bond’s effective yield becomes competitive with the new bonds offering higher rates.

Interest rates on bonds are determined by various factors, primarily influenced by prevailing market conditions. When interest rates rise, newly issued bonds typically offer higher coupon rates to attract investors, making existing bonds with lower rates less attractive in comparison. 

Conversely, when interest rates decline, older bonds with higher coupon rates become more desirable, potentially driving up their market value.

Key takeaway:

• Bond prices are inversely related to interest rates.
• Rising rates can cause existing bond prices to fall, potentially affecting your investment value.

Bond funds and ETFs: building diversity into your portfolio

Bond funds and exchange-traded funds (ETFs) offer a convenient solution, pooling money from multiple investors to buy a diversified portfolio of bonds. It’s like a one-stop shop for bond investing. Managed by professionals, these funds provide instant diversification and come in various types, such as government bond funds, corporate bond funds, and more.

Like bond funds, ETFs offer diversification, trading on stock exchanges just like ordinary stocks. This means you can buy and sell them throughout the trading day at market prices. Stash can help you invest in corporate, government, or a mix of bonds to appropriately diversify your portfolio and cater to your ultimate financial goals.

Investing made easy.

Start today with any dollar amount.

Get Started

Bond FAQs

1. How much is a $10,000 savings bond worth?

The ultimate value of a savings bond depends on its type, interest rate, and the time it has been held. Savings bonds are typically issued at face value and earn interest over time. To find the current value of your $10,000 savings bond, you can use the U.S. Treasury’s online Savings Bond Calculator.

2. Can I buy bonds on my own?

You can purchase bonds through various channels, including banks, brokers, and online platforms. Many government bonds can be bought directly from the U.S. Treasury through their website. For corporate and municipal bonds, you’ll likely need a brokerage account.

3. How much do one-year Treasury bonds pay?

Interest rates on Treasury bonds vary based on market conditions. To find the current yield on a 1-year Treasury bond, you can visit the U.S. Treasury’s website or check financial news sources. Keep in mind that interest rates fluctuate, so the rate you see today might be different tomorrow.

4. What is a $500 savings bond worth today?

The value of a $500 savings bond depends on factors like its type, interest rate, and how long it has been held. To determine its current worth, you can use the Savings Bond Calculator provided by the U.S. Treasury. Remember, the longer you hold the bond, the more it can grow in value.