Lately I've been hearing from bank CD investors who are thinking of venturing into the bond market for the first time. The thought makes me wince. Bonds have had a great run the past three years, but investment trends do not last forever. Anybody buying bonds now needs a good grasp of the risks involved.
Although bonds are popular, they are not always well understood. When you buy a bond, you lend money to the issuer, who promises interest payments and the return of your principal on a certain date. Many people buy bonds because they perceive them to be safer than stocks. However, people can and do lose money on bonds. There are two ways that happens. One is that the issuer defaults on payments. The other is that interest rates go up.
Buying a U.S. government bond or a AAA-insured bond and holding it to maturity is the safety-conscious approach to bonds. The down side is that it does not pay well. There is a direct relationship between the safety of a bond and the interest it pays. If you stick with safety, you may not do any better than you would shopping around for the best rate on a bank CD.
My big concern right now is interest rates. Bond prices and interest rates work something like a child's teeter-totter. When rates go down, prices go up and vice versa. Because interest rates fell so far, they have a lot more room to move up than down. In fact, they've already started heading up. If that trend continues, bonds will be worth less. If you have to sell them before maturity, you will get less than you paid. And if you own bonds through a bond mutual fund, your fund shares will be worth less. Long-term bonds move up and down the most, so they entail the most risk.
U.S. savings bonds work differently from other bonds. They maintain their principal value, adjusting their rates as interest rates rise. However, they lag the markets, which means rates won't go up as quickly on savings bonds as they will on other bonds and CDs.
One reader, who does not have a computer, asked where to find a book on bonds. The Internet is unbeatable for keeping track of investments, but you can still learn about investing the old-fashioned way.
Most general reference books on investing include a chapter about bonds. For example, Investing for Dummies by Eric Tyson goes over the basics in a chapter titled "Only Bankers Get Wealthy Lending Money." TV investment guru Suze Orman covers "Bonds and Bond Funds" in The Road to Wealth.
Specialized books also are available, such as All About Bond Funds: A Complete Guide for Today's Investors by Werner Renberg and Savings Bonds: When to Hold, When to Fold and Everything in Between by Daniel Pederson.
If you are looking for a book, I recommend starting at the public library. If you don't find what you need there, visit a book store.
Q. I sold my house in 1991 and gave the buyer a mortgage, so the sale came under the rules of an installment sale. Will the monthly payments made this year prior to May 5 be taxed at the old rate of 20 percent and the payments made after then qualify for the new rate of 15 percent?Yes. That's the word from Mark Luscombe, principal analyst for tax information publisher CCH Inc. in Illinois.Q. My mother would like to redeem her savings bonds, but she is 97 and bedridden and cannot get to the bank. Can we have her signature notarized for redemption?You can, but it is a bit complicated. Savings bond officials say two witnesses in addition to the notary must be present. The witnesses must sign a letter stating that your mother is homebound and unable to go to the bank. Their signatures must also be notarized and their names and addresses stated in the letter. If your mother were in a nursing home rather than at home, a letter about her circumstances would need to come from the director of the facility.
The bonds and the letter should be mailed to the Federal Reserve Bank of Richmond, P.O. Box 27622, Richmond, VA 23261. If you have additional questions about the process call toll-free 1-800-322-1909.
- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.
