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Stepan Artemyev
Stepan Artemyev

How To Buy Illinois Bonds !!BETTER!!

Generally, a bond that matures in one to three years is referred to as a short-term bond. Medium- or intermediate-term bonds are generally those that mature in four to 10 years, and long-term bonds are those with maturities greater than 10 years. Not all bonds reach maturity. Callable bonds, which allow the issuer to retire a bond before it matures, are common.

how to buy illinois bonds

Savings bonds are also issued by the federal government and backed by the "full faith and credit" guarantee. Unlike many other types of bonds, only the person(s) in whose name a savings bond is registered can receive payment for it.

The two most common types of savings bonds are Series I and Series EE bonds. Both are accrual securities, meaning the interest you earn accrues monthly at a variable rate and is compounded semiannually. Interest income is paid out at redemption.

Most corporate bonds trade in the over-the-counter (OTC) market. TRACE, the Trade Reporting and Compliance Engine, provides real-time price information for corporate bonds. TRACE brings transparency to the fixed income market and helps create a level playing field for all market participants by providing comprehensive, real-time access to bond price information.

Agency securities are bonds issued by U.S. federal government agencies (other than the U.S. Treasury) or by GSEs. Most agency bonds pay a semiannual fixed coupon and are sold in a variety of increments, generally requiring a minimum initial investment of $10,000.

With the exception of bonds issued by Ginnie Mae, agency securities are not fully guaranteed by the U.S. government. The issuing agency will affect the strength of any guarantee provided on the agency bond. Evaluating an agency's credit rating before you invest should be standard procedure. Many credit rating agencies make this information available on their website.

Municipal bonds, or muni bonds, are issued by states, cities, counties, towns villages, interstate authorities, intrastate authorities and U.S. territories, possessions and commonwealths to support their obligations and those of their agencies. They are generally backed by taxes or revenues received by the issuer.

No two municipal bonds are created equal, which can make the muni bond illiquid. The Municipal Securities Rulemaking Board (MSRB) has educational information on muni bond investing, and its EMMA website has tools, data and disclosure documents to help compare and evaluate municipal securities.

You can purchase bonds issued by foreign governments and companies as another way to diversify your portfolio. Since information is often less reliable and more difficult to obtain for these bonds, you risk making decisions on incomplete or inaccurate information.

Like U.S. Treasurys, many international and emerging market bonds pay interest semiannually, although European bonds traditionally pay interest annually. Unlike U.S. Treasurys, however, there can be increased risks for U.S. investors who buy international and emerging market bonds, and buying and selling these bonds generally involves higher costs and requires the help of your firm or investment professional.

A bond fund is a mutual fund or exchange-traded fund that invests in bonds. These funds can contain all of one type of bond (municipal bonds, for instance) or a combination of bond types. Each bond fund is managed to achieve a stated investment objective.

Say the Fed raises the discount rate by .5 percent. The next time the U.S. Treasury holds an auction for new Treasury bonds, it will quite likely price its securities to reflect the higher interest rate. Those new bonds pay more interest. What happens to the Treasury bonds you bought a couple of months ago at the lower interest rate? They're not as attractive. If you want to sell them, you'll need to discount their price to a level that equals the coupon of all the new bonds just issued at the higher rate.

It works the other way, too. Say you bought a $1,000 bond with a 6 percent coupon a few years ago and decided to sell it three years later to pay for a trip to visit your ailing grandfather, except now, interest rates are at 4 percent. This bond is now quite attractive compared to other bonds out there, and you'd be able to sell it at a premium.

The tax rules that apply to bonds are complicated. Whether or not you will need to pay taxes on a bond's interest income (coupons) or a bond fund's dividends often depends on the entity that issued the bond. You might want to check with your tax advisor about the tax consequences before you invest.

Some bonds (often including those issued by industrial and utility companies) contain sinking fund provisions, which require a bond issuer to retire a certain number of bonds periodically. This can be accomplished in a variety of ways, including through purchases in the secondary market or forced purchases directly from bondholders at a predetermined price. That latter method is referred to as refunding risk. Refunding risk also leads to reinvestment risk (see below).

This is the risk that the yield on a bond will not keep pace with purchasing power. For instance, if you buy a five-year bond in which you can realize a coupon rate of 5 percent but the rate of inflation is 8 percent, the purchasing power of your bond interest has declined. All bonds but those that adjust for inflation, such as TIPS, expose you to some degree of inflation risk.

This is the risk that than an event, such as a merger, acquisition, leveraged buyout, major corporate restructuring or other event might result in changes in a company's financial health and prospects, which might trigger a change in a bond's rating. Event risk is extremely hard to anticipate and might have a dramatic and negative impact on bonds.

Average MaturityAverage maturity is the average time that a mutual fund's bond holdings will take to be fully payable. Interest rate fluctuations have a greater impact on the price per share of funds holding bonds with longer average lives.

CommissionA commission is a fee paid to a brokerage firm or investment professional, as an agent of the customer, for executing a trade based on the number of bonds traded or the dollar amount of the trade.

Full Faith and Credit of the U.S. GovernmentTreasurys, savings bonds and debt securities issued by federal agencies are backed by the "full faith and credit" of the U.S. government, which is a promise by the U.S. government to pay all interest when due and redeem bonds at maturity.

Government-Sponsored Enterprise (GSE)A GSE is an enterprise that's chartered by Congress to fulfill a public purpose but is privately owned and operated, such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Unlike bonds guaranteed by a government agency such as the Government National Mortgage Association (Ginnie Mae), those issued by a GSE are not backed by the "full faith and credit" of the U.S. government.

Municipal BondA municipal bond is a bond issued by a state, city, county or town to fund public capital projects like roads and schools, as well as operating budgets. These bonds are typically exempt from federal taxation and, for investors who reside in the state where the bond is issued, from state and local taxes, too.

PremiumIn relation to bonds, a premium is the amount by which a bond's market value exceeds its issuing price (par value). A $1,000 bond selling at $1,063 carries a $63 premium.

Primary MarketThe market in which new issues of stock or bonds are priced and sold, with proceeds going to the entity issuing the security. From there, the security begins trading publicly in the secondary market.

Separate Trading of Registered Interest and Principal of Securities (STRIPS)STRIPS are Treasury Department-sanctioned bonds in which a broker-dealer is allowed to strip out the coupon, leaving a zero-coupon security.

TreasuryTreasurys are negotiable debt obligations that include notes, bonds and bills issued by the U.S. government at various schedules and maturities. Treasurys are backed by the "full faith and credit" of the U.S. government.

Yield CurveA yield curve is a graph showing the relationship between yield (on the y- or vertical axis) and maturity (on the x- or horizontal axis) among bonds of different maturities and of the same credit quality.

Yield to Worst (YTW)YTW is the lower yield of yield-to-call and yield-to-maturity. Investors of callable bonds should always do the comparison to determine a bond's most conservative potential return.

Zero-Coupon BondA zero-coupon bond is a bond that doesn't pay a coupon. Zero-coupon bonds are purchased by the investor at a discount to the bond's face value (e.g., less than $1,000) and redeemed for the face value when the bond matures.

General obligation bonds (GOs)General obligation bonds are issued by governmental entities but are not backed by revenues from a specific project, such as a toll road. Some general obligation bonds are backed by dedicated taxes on property, while others can be payable from general funds. The latter types of bonds are often referred to as "backed by the full faith and credit" of the governmental entity. While in many instances, "general obligation" means that the issuer has unlimited authority to tax residents to pay bondholders, there are cases in which the issuer or governmental entity may have limited or no taxing authority.

Revenue bondsPrincipal and interest payments for revenue bonds are secured by revenues generated by the issuer or by certain taxes such as sales, fuel, or hotel occupancy taxes. The only exception is when a municipality issues bonds as a conduit issuer. In those cases, while the municipality is the issuing entity, a third party is responsible for payments of both interest and principal. To learn more about conduit issuers, please see our section on Conduit bonds. 041b061a72


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