Three Things You Need to Know In Evaluating Bond Pricing

Many people feel that investing in municipal bonds is safer than playing the stock market. However, before you decide to invest in bonds, there are a few things that you need to know about bond pricing.

Bond Pricing

Bond pricing can be tricky, as the math used is quite advanced. Bond valuation charts are confusing and difficult for the average investor to read. You may feel like you need an economics degree to decipher the lingo! However, many areas offer high tax exempt yields on municipal bonds, making them a great investment once you figure out the bond pricing issues. You may need professional help to decide which bonds are right for you.

Bond Security

Bonds involve higher risk than traditional money market accounts, and municipal bonds are generally riskier than federal bonds. Federal bonds are backed by the entire U.S. Treasury, while municipal bonds are only backed by the treasury of the area where they're issued. Municipalities can and do go bankrupt, so these bonds carry a greater risk of loss than federal bonds. While the bond pricing may be attractive, be sure to do your due diligence before making a purchase.

The Risks of Bonds

There are several risks involved when you purchase bonds. The market price of the bond rises and falls as interest rates rise and fall, and there is a slight risk of default. In this economy, you should think about whether the municipalities from which you're purchasing bonds could default, and whether this concern outweighs the benefits of low bond pricing.

In general, the benefits of low bond pricing outweigh potential risks. Most investors find that they're pleased with bond purchases, and many return to purchase more bonds. However, as with any financial decision, it's wise to do your research before spending money. Evaluate bond risks, bond security, and bond pricing, then make the choice that's best for you.