Purchasing of a bond normally means that this transaction is equivalent to giving a loan to the issuer. As such, it is important to put into consideration a number of factors before buying the bond. In this regard, it is important to consider the maturity of a bond. Usually, there are short and long-term maturities thus the purchaser should consider if the duration it will take for the bond to mature is convenient for him/her. Generally, the purchaser will get more interest payments in total for bonds with long maturities than those with a shorter maturity hence it is important for the person buying the bond to choose a suitable one.
Secondly, it is necessary to consider the level of credit worthiness of the issuer (Nakisa, 40). In any case, this is one of the risks associated with bonds; therefore, it is important for the buyer to take utmost care. The issuer could default by either failing to pay the coupons or the principal amount when the bond matures. Therefore, assessing the credit worthiness of the issuer as well as his credit history will help to put the person purchasing the bond at ease.
Thirdly, exit options are another factor that cannot be overlooked. This is especially important if the buyer suspects that he is likely to exit from the investment in the bond before the agreed date (Nakisa, 62). For instance, existing bonds may attract a much lower interest than that of new bonds and this may lead an investor to sell it at a lower price than what they bought it. In this case, it is wise to buy a bond if the exit options are not favorable.
Finally, the tax bracket of the bond is an important factor. There are bonds, which enjoy a tax advantage and are thus more preferable than those that are tax bound. For instance, municipal bonds do not attract tax and thus they may be more preferable even though they tend to have lower interest rates than that of the taxable bonds thus lowering the gains by the investor. Therefore, the investor would need to select either the taxable bond or the one that is tax free depending on his needs.
Works Cited
Nakisa, Ramin C. A Financial Bestiary: Introducing Equity, Fixed Income, Credit, Fx, Forwards, Futures, Options and Derivatives. Amersham: Chesham Bois, 2011. Print.
