at maturity,” he says. The issuer will not make any interest payments over the life of the bond, but the interest will accumulate until it equals the face value. The depth of the discount price is dependent on the life span of the bond, with long-term securities offering the best yields.
Zero coupons are better suited for long-term bondholders who are not seeking regular interest payments from their securities. “For the more sophisticated, aggressive investors, zeros are a really good choice,” says Bryant. Their comparatively cheap price is also an attractive feature. “If you have, for example, $10,000 to invest, you could buy ten regular bonds and reap the interest payments. But if you got into zeroes, you could spend half that amount on buying bonds with the same par value and also have some cash left to put into other types of bonds and stocks,” Bryant explains.
The last category, preferred securities, are unusual in the fixed-income world because they are traded like stocks — available in denominations as low as $25 a share — and are listed on the major indexes. Preferred securities are widely known as fixed-rate capital securities and are called “preferred” because issuers are obligated to pay the interest before paying dividends on common stock. The yields
TAKING SAFETY IN BONDS
on preferred securities, typically higher than other fixed-income investments, are paid every quarter.
an easy way for a corporation, a bank, or a utility to raise capital. They are, however, a little tough to locate, but your broker should be able to get you a list of issuers offering them,” says Bryant. Fixed-income securities are closely allied to the equities market, making them a questionable investment in these uncertain times. “If you like a particular company for stocks, then you may want to check to see if they’re offering preferreds,” says Bryant, adding that investors should be fully confident in the viability of an issuer before buying preferred bonds.
HOW TO BUY BONDS
Bonds should be a part of everyone’s investment portfolio, whether you’re just starting to invest or are trying to preserve wealth for retirement (See sidebar, “Bond Portfolios for Life”). Both Bryant and Landers suggest that inexperienced bond investors begin by purchasing bond mutual funds (see, “Which Way Is Up?” in this issue). Initial investments into most bond funds are the same as most mutual funds: $1,000 for the first purchase, with subsequent purchases available in $100 increments. The range of fixed-income securities available in a fund is also an attractive bonus.
One of Landers’ clients, Rosalie Cochrane, 63, has avoided the unpredictable surges and declines in the equities market by maintaining a relatively high percentage of her investments in corporate bond funds. “My portfolio is around 47% to 50% bond funds, split between the Delaware Corporate Bond Fund (DGCAX) and the Delaware Extended Duration Bond Fund (DEEAX),” says Cochrane. A retired widow who lives, and works part-time, in Long Island, New York, Cochrane has relied on the interest payments from her bonds, currently yielding around 7.5%, as income for