How to Buy a Debt

Buying debt

Identify various forms of debt. There are many issuers of debt from which to choose. First, there is the choice between corporate and governmental debt. And within government- issued debt, one then has to choose between federal, state, local and special purpose bonds. Likewise, one should determine the time period on the bonds desired. Generally, bonds can be categorized as short-term, intermediate or long-term.

Identify the debts packaging options. The bonds can be outright, i.e., they are not packaged as part of a portfolio in a mutual fund or an Exchange Traded Fund ("ETF"). Altermatively, one can invest in mutual funds or ETFs that hold bonds. Mutual funds and ETFs are especially useful for creating a diversified portfolio of bond investments because they allow a small investor to buy into many types of bonds in one investment.

Consider tax implications of different debts. Many state and municipal bonds offer tax-free yields, which make them desirable for individuals with high incomes (and consequently who are in high tax brackets). However, for individuals in lower tax brackets and for those investing moneys in Individual Retirement Accounts, the tax-free attribute is not as meaningful.

Examine the credit ratings of different debts. Bonds are rated by Standard & Poors, Moody's and Fitch's, based on the financial health of the company/government issuing them and the resulting risk associated with the bond. Bonds with higher risk usually offer higher yields, but this is because there is a higher risk of default by the issuer. Before investing in bonds, one should determine how risky the bond is.