What to Know Before You Invest in Bond Offerings

Whether you invest in bond, stock or other financials, you’ll still need to pay attention! You’ll have to understand and examine projected earnings, any debts or irregularities in the company issuing the bond, and any legal factors that might affect your investments. You are basically doing the same job as a bank, because in this case you are the bank! By investing in bonds you are in effect lending money to a third party, and you need to know that you will be paid back.

Apart from the stock market, there is no central trading point for bonds. Nevertheless, trading stock can be a simple process. With a brokerage account either online or with a qualified full-service broker, you can log in or call to place orders. That part is simple enough. There are also a number of reputable bond rating agencies. Moody, and Standard and Poors are both companies rating bonds according to detailed formulas and then publishing their findings.

After that, you need to be aware of the mechanics of buying and selling. The purchase price, the sale price and the interest rates are all factors to be aware of. Probably of most interest to you will be the payment of principal at maturity. This is the date when the principal amount must be paid in full along with interest payments that are made twice a year.

When you invest in bond offerings, it means accepting a certain level of risk. What is good to know is that as a bondholder, you have precedence for being paid over shareholders that own company stock, although lower risk is typically linked to lower returns. Of course, this is only useful if there is still money in the company to pay out.

Bond prices can vary, just like stocks. The opening price and the interest rates are defined at time of issue. After that, the resale price can vary significantly either upwards or downwards. One important factor is the interest rate. If for example the interest rates on bank loans or real estate loans decrease sharply after the date of issue, then the interest rate of a bond will look good by comparison. Therefore the market price of the bond will typically go up.

As an example, if you buy a ten year bond for $500 which is paying six percent and a year later other interest rates decreases to five percent then this bond now pays more interest than other competing investments. Therefore you could sell it at a higher price than what you paid for it. The jargon used is "over 100" for bonds that attract this re-sales premium and "under 100" for bonds which have fallen in value. So if your bond bought for $500 was now worth $600, it is selling at a premium. Although interest rates are a factor in all of this, it’s important to understand that many factors intervene and when you invest in bond financials, and you will need to take them all into account.