Forex Investment and Currency Trading

The varieties of bonds abound, created to meet all kinds of investing strategies – and all kinds of borrowing needs. Each type offers different advantages and disadvantages.

U.S. Government Bonds

There are three general groups of U.S. government securities:

• Treasury bills, bonds and notes
• Federal agency issue bonds, notes, and certificates
• U.S. savings bonds

These bonds are nearly risk-free, so they usually offer fairly low interest rates. This makes them attractive to conservative investors. The interest generated by federal government securities is exempt from state and local income taxes.

Zero Coupon Bonds

Zeroes are corporate, municipal, or treasury bonds that pay no annual interest (coupon rate is another term for interest rate; so a zero coupon bond is a bond that pays zero interest). Investors buy zeroes at deep discounts and then redeem them for full value at maturity. The profit on that difference in value replaces the annual interest. Zeroes allow you to buy more bonds for your money. Be careful, though, you may be taxed annually as if you earn interest even if you don’t actually receive the interest. Ask your financial or tax advisor.

More Thinking Like a Lender

It might be helpful to ask certain questions when you’re considering investing some of your money in bonds.

• How much should I lend?
• Is the borrower creditworthy?
• Will I earn enough interest on my loan?
• When and how will I be paid?

Convertible Bonds

Some corporate bonds are convertible meaning they can be exchanged at a specified time for a specific number of shares of stock held by the company that issued the bond. You earn income and can still benefit as an owner if the stock price rises. Convertible bonds usually are less volatile in price swings than the common stock from the same company, possibly because investors have:

• The added benefit of earning regular income and therefore may be less inclined to sell;
• Priority for repayment over common stockholders in cases where the company goes bankrupt.

Short-Term Fixed Income Funds

By investing in these funds, you pool your money with other investors. The fun manager then lends your money for somewhat longer periods than in money market funds.

Generally, the strategy is to minimize the possibility of loss due to a borrower failing to repay. Many people investing for protection consider the added risks of these funds to be minimal and worth the opportunity to earn a little more interest.

Capital gins on a bond are taxable even if the interest on the bond is tax-free.

Corporate Bonds

Corporations often finance major projects by issuing bonds rather than selling stock, primarily because of tax regulations. Although most state laws require corporations to pay bondholders before paying short-term creditors, experts recommend that investors consider the following factors when planning a corporate bond investment:

• The financial quality of the company;
• The company’s current profitability;
• The company’s long-term financial outlook and stability.

Every year, over 100 bond-issuing corporations file for bankruptcy and cause their bondholders to lose money.

Municipal Bonds

Municipal bonds are long-term loans made to state and local governments to finance public improvement projects. Income is usually paid semi-annually, and if the bond was issued in your home state, the interest you earn is free from federal, state, and any local income tax. That means you keep more of what you earn – but it also means that the interest rates are lower than taxable bonds. It’s important to check your tax rate and see whether you would earn more after taxes from a municipal or a corporate bond. There are two main kinds of municipal bonds:

General obligation bonds, which raise money the government may use for any purpose it wishes;
Revenue bonds, which raise money for specific projects such as building a new power plant or highway. The interest is paid from project revenues.