Call Features

Sometimes the bond issuer is offered the option to call the bond at a specific price at a specific period of time. It's important to take this into account when purchasing a bond. Calculating the yield to call, or the value of the bond based on the coupon rate, length of time to call date and market price, will tell you the expected yield of the bond if it is called.

Price

As with any purchase, price is key! Some bonds may trade at a premium, or a price above par value, and others may trade at a discount, or a price lower than par value. Premiums usually indicate lower prevailing interest rates or higher credit quality, while a discount may indicate higher prevailing interest rates or lower credit quality.

Just like calculating yield to call helps you determine the bond's yield in a call situation, yield to maturity can help you calculate expected yield at the bond's maturity date. This can be very useful information when you're deciding whether a particular bond is a good investment for you.

Taxes

Many bonds have attractive tax exempt features. In general, interest on treasury bonds issued by the U.S. government will be exempt from state and local taxes. Municipal bond interest is not taxed at the federal level, and in many cases, state and local tax exemptions may be available as well. Taxes may be due on the phantom "income" from zero coupon bonds, which do not pay interest but are instead sold at a discount to par and accrue "income" over the course of their lives.

Risks

Along with the features of bonds, it's important to consider the risks. Among the top risk factors are:

Interest Rate Risk - Changes in prevailing interest rates can have a direct affect on bonds. Bond values are inversely related to interest rates, meaning when rates go up, the principal value of a bond decreases, and vice versa. Longer maturity bonds increase the risk of rate fluctuations.

Credit and Default Risk - As mentioned in the Credit Quality section above, the health of the bond issuer can be a significant risk factor. Treasuries backed by the U.S. government have the lowest risk, while corporate bonds issued by independent corporations are considered to have the highest risk.

Call Risk - Because the issuer generally calls bonds only when prevailing rates are declining (meaning the value of your bond is increasing), they have the advantage. If your bond is called, you're left with the principal sum that can be reinvested, but because rates are low, you'll miss out on the income you would have had if the money had continued to be invested at the higher rate.

Purchasing Power Risk - Bonds are often issued with a fixed income rate. As inflation increases, your fixed income rate loses purchasing power.

Bond Research

Mike Shamia recommends four ways for Scottrade customers to research any bond from any issuer before buying:

1. Log in to your account on www.scottrade.com. Click the Trade tab, and choose CDs & Bonds from the left-hand menu. A series of menus along the top will help you find all the information you need about a particular bond or bonds in general.

2. Call your local branch office. If you're considering a particular bond and have questions about it or its particular tax exempt benefits, your local broker will be able to get you all the information you need.

3. Visit the Financial Industry Regulatory Authority at www.finra.org. FINRA can provide detailed information about bonds for investors.

4. Visit the Securities Industry and Financial Markets Association (SIFMA) Web site dedicated to educating investors on bonds at www.investinginbonds.com.