Bond Investment Strategies
Preserving Principal and Earning Interest
When you invest in a bond and hold it to maturity, you will get interest payments annually or twice a year and receive the face value of the bond at maturity. If the bond you choose is selling at a premium because its coupon is higher than the prevailing interest rates, keep in mind that the amount you receive at maturity will be less than the amount you pay for the bond.
If interest rates rise, and the market value of your bond falls, you will not feel any effect unless you try to sell the bond. Holding on to the bond means you will not be able to invest that principal at the higher market rates, however.
If the bond you choose is callable, you have taken the risk of having your principal returned to you before maturity. Bonds are typically “called,” or redeemed early by their issuer, when interest rates are falling, which means you will be forced to invest your returned principal at lower prevailing rates.
When investing to buy and hold, be sure to consider:
- The coupon interest rate of the bond (multiply this by the par or face value of the bond to determine the dollar amount of your annual interest payments)
- The yield-to-maturity or yield-to-call. Higher yields can mean higher risks.
- The credit quality of the issuer. A bond with a lower credit rating might offer a higher yield, but it also carries a greater risk that the issuer will not be able to keep its promises.