When to invest in bonds

Almost all experts agree that it is important to have a diverse investment portfolio that includes cash assets, some investments in stocks, and some investments in bonds. However, it's tricky to know when to invest in bonds and how to invest in bonds. Here are some of the key factors that you need to consider when you are looking at whether or not it is time to invest in bonds, and when you are trying to choose which bonds you want to invest in.

Tips for knowing when to invest in bonds

1. Consider the interest rate

There are three different types of interest that can be paid by bonds: fixed interest, floating interest, or interest that is payable at maturity. If you are looking into debt securities, the majorities of those carry an interest rate that will remain fixed until the security reaches maturity, and then will be a percentage of the principle amount of the security. Most typically, the investors in the security will receive their payments semiannually. When the bond matures, you will receive the full face amount of the bond.

However, many investors prefer to purchase bonds that have an adjustable interest rate that will more closely follow and correspond with the current market interest rates. These are bonds with floating interest rates. The interest rate on these floating-rate bonds will be reset every once in a while so that it will be in line with changes in any base interest-rate index. One of these base interest-rate indices is the rate on Treasury bills.
Finally, some bonds don't pay out periodically on interest. Instead, the investor will receive a payment at maturity that will be the same as the purchase price, or the principal, of the bond, plus the total interest of the bond as compounded semiannually at the original fixed interest rate. These bonds are sold at a discount from their face amount. They are called zero-interest bonds. If the bond is taxable by the IRS, then the interest will be taxed as it builds up over the life of the bond before it reaches maturity.
2. The maturity of the bond
What is a bond's maturity? The maturity of the bond is the name for the date in the future when your-the investor's-principal is going to be repaid. These bond maturities can be only one day, or they can even be 30 years. Some bonds have even been issued for terms of up to 100 years. Here are the categories of maturity rates:
Short term notes: maturities of 0-5 years
Intermediate term notes: maturities from 5 to 12 years
 Long-term notes/bonds: maturities from 12 years to longer

3. Consider the redemption features
Certain bonds have particular redemption features that alter the life of the bond, regardless of the maturity period of the bond. "Call provisions" require the issuer or allow the issuer to repay the principal at a particular date before the bond matures. Most often, a bond will be called when interest rates are significantly lower than they were when the bond was issued. Always ask if there is a call provision, and make sure that you get the "yield to call" along with the "yield to maturity."
Some bonds have "puts" rather than "calls." This gives the investor the option to require the issuer to buy the bonds back at particular times before the bond gets to maturity. Usually an investor will "put" when he or she needs cash or when interest rates have risen during the life of the bond. Then they can reinvest the price in a bond that has a higher interest rate.