I have a question about bonds. I have a CD maturing. There is a Financial Counselor with Edward Jones, trying to convince me to invest in bonds. I have been investing in annuities. CD's are not paying anything.

I don't exactly understand what bonds are. He is telling me I can get a return of 6.25% paid monthly. He says I need to diversify.

Can someone offer advise on investing in Bonds?

__________________
Regards,
Windjammer

6.25 is very high for anything investment grade...more then likely its a corporate bond fund that has alot of low grade bonds.

A few questions, is it a single bond issue? if so who issued the bond? a company, or a state? If its a company then their is a grade or rating to the bond from moody's and s&p (most pay to have both rate their debt prior to issue as it enhances the market for selling the issue)

Second- when does it mature?

Third- is their a "call" feature on the bond- can the issurer call in and retire the debt prior to full maturity? In a falling rate market most issurers will call in the debt and then in the future do another offering at a lower rate...why continue to pay someone 6% today based upon an offering from years ago when you can "call" reclaim the bonds at a pre set price and then issue new bonds/debt at a lower rate 3-4%.

What is the selling price. Par is 100.00, a premium bond (has nothing to do with being good, better or best) but is one that is selling for a price greater then 100.00 eg. 102.5, 101, 105.00

Bonds that sell at prices greater then 100.00 or the par offering price have to do with a market where the current interest rates have fallen. When rates fall the value increases and when interest rates rise, the value of the bond in the secondary (current) market declines and this is what creates a discount bond eg. 98.00 99.00. A deep discount bond trading at 40.00 60.00 has more to do with a default or being considered junk.

What are your needs? do you need monthly income? quarterly income? Will you ever need the principal back?

****A big word of caution, most experts agree that in the near future the Fed will/ must raise interest rates*** this will cause an immediate decline in the (mark to market) current value of your individual bonds or bond fund. Your monthly statement will drop in value.

***Another bit of caution is there are two types of bonds- revenue and g.o.'s (general obligation bonds- backed by taxes) the latter are far more secure all things being equal. An example of a revenue bond would be a stadium that was built and part of the money for the project was the result of bonds being sold based upon the future ability for the stadium to generate revenue and pay back the coupon payments.

I can go on and on...I spent 10 years as a licensed principal of an investment company. If you wish to talk pm me and i will give you my home phone.

Edward Jones bought up a lot of tax exempt state bonds with unusally high returns for the current market, which were related to the Fed "stimulus" program, and were offered high to sell quick and meet Fed deadlines.
I bought a modest amount of it. They looked pretty secure.

The main thing about individual bonds is you are loaning money and can't get it out if you need it suddenly. You can sell it, but if the interest rates skyrocket, you'll lose principal since nobody will pay face value.
If you're retired and buy a 25 year bond, your heirs will probably get the principal and you'll draw interest until you die.

As bigshot says, there is a lot to know about buying bonds and individual stocks too, for that matter. The bond market is scared spitless about the Fed policies, with interest rates being extremely depressed.

__________________
Science plus Art

bigshot500 ....... thank you very much. You have given me some insite on questions to ask. The advisor said he would pick the bonds, but Bank of America bonds were very high on his list. I'm retired and looking for monthly income to add to what I'm getting from annuities and SS.

The rep. is a neighbor and I guess Edward Jones is OK. I thought 6.25% was a good rate. I didn't know this rate could go down.

__________________
Regards,
Windjammer

The rate will be fixed, the value of the bonds which are priced daily (its called mark to market) will change. If rates rise the principal value will decline. If the parent offering company rating gets cut the value of their debt- bonds will decline.

If the EJ rep is any good, he will be willing to help you understand exactly what you are investing in, and all the ups and downs involved. If he's willing to do that, let him teach you. Then get on the internet or go to the library and verify what he is telling you. Beware of an "investment advisor" who is steering you toward one investment. He's recommending that you diversify, so that may be a good sign.

Don't ever invest in anything you don't understand. And don't ask me how I know that.

__________________
Insert short witty words here

To me, the most important thing to remember about BONDS, not bond funds, is that they always sell to YIELD whatever the current rate is. Therefore, you are going to pay a premium to buy those bonds, so that the YIELD will be 2% or whatever the current rate is.

Here's some good basic info (even tho as a member, I detest AARP). Some off the cuff advice (worth what it costs) - avoid bonds now - remember the 13% 30yr T-Bonds during the Carter years?

How Bonds Can Bite: Five Steps to Smart Investing - AARP The Magazine

__________________
Lou

I've got some US savings bonds that are paying over 6% (according to the downloadable Savings Bond calculator program) but I don't think you could get that rate with new ones.

I want thank everyone for their input. Lots of knowledge and experience here. People like EJ don't tell you of the down side. They are trying to sell, that's their job.

Now, at least, I can have some questions to ask before going that route.

__________________
Regards,
Windjammer

Some good advice here. I also think that if you are using this as a major source of continued income, I would strongly consider a no-load low fee bond fund versus individual bonds. This may slightly reduce your yield but also greatly reduce your risk of major default/loss. Larger mutual funds, like Vanguard, use their own internal rating committees versus the standard Moody's which helps avoids the conflict of interest that has been an issue for a long time. Also, with the current low interest rates there is a great chance that these bonds prices will drop which won't impact your monthly payout but will impact your principal. The longer the duration of the bond (like 10+ years) the greater the fluctuation in price and the higher the return (of course the higher the return the higher the risk). I would stick to intermediate duration bond fund (yield to maturity of 4-6 years). This will give you a good return, reduce loss of principal, and may give you the flexibility to sell if you unexpectedly needed the principal investment. If you purchase a mutual fund, you could buy a quantity each month to dollar cost average your purchase over the next year or so which would also reduce the risk a bit.
One last tip (and I'm don't work for a mutual fund and I'm not a financial adviser), be careful with fees charged up-front and annual costs/management fees as these can kill your return quickly and often make the purchaser feel like they are trapped in a fund because they paid alot up front to get into it. I've seen bond funds that charge 1% a year on a 3% return. Good luck!

He's a cancer in the clubhouse and the Giants are a better team without him....

__________________
I used to be disgusted..

What is the tax rate on bond interest? Generally it's taxed at ordinary income rate that is double or more than the favorable cap gains rate of 15% placed on stock dividends.

I made my own high yield fund with dividends taxed at 15% cap gains rate, as well as future long term profits get long term 15% cap gains rate. Among income stocks I own are EliLilly LLY, Vectren Energy VVC, Phfizer PFE, Hugoton Royalty trust HGT, Frontier Communications FTR, ConAgra Foods CAG, et al and then put about 30% in solid bank stocks. I own SYBT, CBIN, PRK, BBT.

I use TD Ameritrade and my computer. This advice is worth what it cost you.

__________________
God spelled backwards is dog.