How to Buy a Debt

Debt can be purchased in many ways and forms. The bigger challenge is determining the best forms of debt to buy. For most investors, buying corporate debt directly from the issuing company is not feasible or practical. Instead, mutual funds and exchange-traded funds that have a portfolio of debts are better tools for small investors. Unlike corporate debt, there are various forms of government-issued debt that are accessible for small investors and can be bought at local banks or directly from the government online.

Buying debt

Step 1

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.

Step 2

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.

Step 3

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.

Step 4

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.

Warning

Several of the forms of debt discussed require significant amounts of money to purchase. For smaller investors, it may be wise to focus on ETFs and mutual funds that invest in debt.

Investments in bonds, like other investments, need to be considered in relation to the overall portfolio of the investor. Consequently, it may be wise to work with a financial expert before deciding to buy bonds.