How do you compare fixed rate bonds?


Quick Answer

Some ways to compare fixed-rate bonds include evaluating level of risk and yield. Government and municipal fixed-rate bonds offer security. Corporate bonds typically provide greater yield with increased risk of default. A portfolio of bonds with a range of short- and long-term maturities offers safety and provides yield, recommends Bankrate.

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Full Answer

When interest rates rise, prices for bonds fall. However, prices for short-term bonds decline less than long-term bonds, notes Bankrate. For low-risk investments, treasury bonds offer security because a federal government bankruptcy is unlikely. With these fixed-rate bonds, principle and interest are paid in full. The second-safest type of fixed-rate investments are municipal bonds.

A general obligation bond is repaid with general tax revenue from the municipality. Revenue bonds typically offer more yield, but are less secure. These bonds are repaid with revenues from a specific municipal project, such as a hospital or convention center, states Bankrate. Providing greater yield are corporate bonds because there is increased risk of bankruptcy. Credit rating agencies believe investment-grade corporate bonds have the least chance of defaulting.

A portfolio of fixed-rate bonds with a range of maturities is optimum with rising interest rates. Short-term bonds offer safety whereas long-term bonds provide yield. Interest rates eventually rise from historic lows; however, until rates rise, the greatest safety for investments is in money market funds and short-term CDs, states Bankrate.

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