I am trying to get a higher rate of return..I have about $125 in CD that is coming up for renewal--I get around 5%..I was thinking about buying some corporate bonds--How do you do that? or any ideas of a higher rate... I can get dividends 4 times a year or so.. thanks Michael
See your stock broker or your banker about corporate bonds. An item to know is that they are sold in units of $1000. If you don't buy them at their IPO, you may pay a bit less than or a bit more than $1000 each depending on how interest rates have changed.
Two big cautions on doing this:
- if the company fails to repay the bond, you may lose all your money in that company. Nobody will back you up.
- it takes a lot of money to buy enough bonds to diversify enough to cover the risk of default.
Bond funds might be an attractive alternative. However, when I look at them, they seem mainly to be a tool to bet on interest rate changes. I find that growth & income funds are a good way to be exposed to bonds without making bets on interest rates.
-john-
How much risk are you willing to take with this money? CDs are very safe. Stocks might yield more (via dividends), but at some risk to the principal. Corporate bonds are somewhere in-between IMO, depending on the issuer and its rating.
About how long will the money stay invested? If less than about seven years (maybe ten), do not buy stocks.
Is it truly only $125 you have to invest? Or will be more added over time?
"M.Balarama" wrote
Higher rates also mean higher risks.
Calculate the difference between the interest you are getting at the
5% rate, and let's say, a 10% rate. And see if the differnce is worth the risk and the effort.
Is that $125 or $125,000? $125 is too little to buy 1 bond which is around $1000 (often you can buy it for a discount), and besides the commissions may be $10 to $40 to buy 1 bond. At ETrade, I think there is no commission if you buy 5 or more bonds, but they probably make money on the bid-ask spread. Some of the good junk bonds pay around
10% to 12.5% a year (like Mrs. Fields, Amer True Temp, Ballys) and you can get them at a 15% or more discount, but there's still risk.There's a risk that you won't get any of your money back, and there's a risk that you may not get the promised interest. Most bonds are also callable, meaning that the company will buy them back before the scheduled maturity date. They will buy it back for more than it's woth now, but will save having to make outrageous interest payments.
BTW, are interest payments from bonds interest or non-qualified dividends? I always report them as interest.
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