Buying Individual Bonds

If you have more money to invest and can stomach a little more risk in order to get a higher return, there are a few things you need to consider. 

The government sells marketable securities, known as Treasury bills, notes, bonds, and TIPS (Treasury Inflation-Protected Securities), with maturities ranging from one month to 30 years. Treasury securities are considered among the safest in the world in terms of default risk, but tend to pay a slightly higher coupon rate compared to savings bonds or I Bonds. You can buy these in $1,000 increments from the government’s TreasuryDirect.gov Web site. You can buy them from a broker as well (see below), but it’s cheaper to get them direct from the source. To tempt investors away from the relative safety of Treasury bonds, other issuers have to offer higher coupon rates—and the riskier the issuer, the higher the rate. 

For example, agencies like the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) issue bonds that aren’t officially backed by the U.S. Treasury, and so carry a higher coupon rate. State and local governments also issue bonds to fund various projects, again with a somewhat higher risk of default. 

Most of these bonds also carry lower coupon rates than federal government bonds, however the interest on these bonds is generally exempt from federal income taxes and (in some cases) from state and local income taxes as well, which makes them more desirable to investors in high tax brackets. Generally, these bonds are not a wise choice for lower-income investors. It is important to compare returns on an after-tax basis. 

Corporations and foreign governments also issue bonds. Much like people, different companies, countries, and government issuers have different credit ratings that gauge the likelihood that they’ll be able to meet their debt obligations. In general, the better the credit rating, the lower the risk of something going wrong—and usually, the lower the coupon rate will be. 

You can buy corporate bonds from a broker, usually in $1,000 chunks, but it can get very expensive, especially if you’re only buying a few bonds at a time. Bonds purchased through brokers often include a mark-up in price that is imbedded in the transaction cost. Every broker has different rules and charges different fees; in general, expect to pay a minimum of $20 to $50 or more, depending on how many bonds you’re buying. The added cost of purchase reduces the effective yield you receive on the bond.