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Maturity
One of the key investment features of any bond is its maturity. A bond?s
maturity tells you when you should expect to get your principal back and how
long you can expect to receive interest payments. (However, some corporates
have ?call,? or redemption, features that can affect the date when your
principal is returned. See Understanding ?Call? and Refunding Risk.)
Corporate bonds, in general, are divided into three groups:
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Short-term notes - Maturities of up to 5 years,
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Medium-term notes/bonds - Maturities of 5-12
years
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Long-term bonds - Maturities greater than 12
years
Structure
Another important fact to know about a bond before you buy is its
structure. With traditional debt securities, the investor lends the issuer a
specified amount of money for a specified time. In exchange, the investor
receives fixed payments of interest on a regular schedule for the life of
the bonds, with the full principal returned at maturity. In recent years,
however, the standard, fixed interest rate has been joined by other
varieties. The three types of rates you are most likely to be offered are
these:
Fixed-rate
Most bonds are still the traditional fixed-rate securities described above.
Floating-rate
These are bonds that have variable interest rates that are adjusted
periodically according to an index tied to short-term Treasury bills or
money markets. While such bonds offer protection against increases in
interest rates, their yields are typically lower than those of fixed-rate
securities with the same maturity.
Zero-coupon
These are bonds that have no periodic interest payments. Instead, they are
sold at a deep discount to face value and redeemed for the full face value
at maturity. (One point to keep in mind: Even though you receive no cash
interest payments, you must pay income tax on the interest accrued each year
on most zero-coupon bonds. For this reason, zeros may be most suitable for
IRAs and other tax-sheltered retirement accounts.
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