Personal finance chapter 13 investing in bonds answers for interview

He received his B. Over the past 25 years, he has taught more than 30 different courses in high school, community college, university, adult education, and teacher preparation programs. Dlabay has developed a wide variety of textbook materials, student activity guides, instructor manuals, testing programs, audio-visual materials, and software packages in the areas of Personal Finance, Consumer Economics, and International Business.

Dlabay has served as a consultant to corporations, educational institutions, and government agencies. He has presented more than workshops and seminars in over 20 states to encourage teachers to actively involve students in the learning process with video presentations, newsletters, interviews, and Internet research activities.

Robert J. Hughes Professor of business at Dallas County Community Colleges, believes that these two words can literally change people's lives. Investors may be able to realize significant tax benefits by including bonds in their portfolios. The following are some considerations for investors when picking bonds for their portfolios.

When it comes to choosing what assets to put into your retirement account, the tax-treatment and benefits of each account will be instructive. It's all about asset location. For instance, Roth IRAs are funded with after-tax dollars and grows tax-exempt. It would thus be redundant to fund that account with tax-free municipal bonds. Instead, bonds with high yields interest rates should be put in a Roth IRA where the interest income will never be taxed. Key Takeaways A well-diversified investment portfolio should have an allocation to bonds, which are often less volatile than stocks and generate interest income.

Understanding the tax structure of your retirement account will help you pick which type of bonds are most appropriate. Treasury bonds issued by the government are the least risky but also lowest yielding, while corporate and junk bonds are riskier but generate a potentially greater return. Tax Advantages of Bonds in IRAs IRAs allow investors to contribute money for retirement on a pretax basis, while earnings are tax-deferred until you withdraw them in retirement.

There are significant tax advantages to holding bonds in IRAs. Bonds are generally taxed at a higher rate than stocks. If bonds are not held in an IRA, income from them is taxed as ordinary income. TIPS are indexed to inflation to prevent investors from holding negative investments. They are issued with five-, , and year maturities. The exception is municipal bonds. These pay tax-exempt interest, which is one of their main benefits.

They offer a lower yield spread because they are tax-free. There is no additional tax benefit to be gained by holding them in an IRA. As such, they are better off being held in a regular account. Treasuries offer the greatest deal of security.

Treasuries are backed by the full faith and credit of the U. The U. The government sells bonds with different maturities to the public to borrow money. The most common Treasuries are the three-month Treasury bill T-bill , the five-year Treasury note T-note , the year T-note, and the year Treasury bond T-bond. Since the financial crisis, the Federal Reserve has kept interest rates near-record lows.

This has kept yields for Treasuries quite low, making them less attractive for investors who are seeking higher returns. There are a number of bond ETFs investors can hold in their IRAs depending on the portion of the yield curve in which the investor wants exposure. The fund tracks the investment results of an index of bonds with maturities in excess of 20 years. TLT is very liquid, with an average one-month daily trading volume of more than 23 million shares.

Further, it has a very low expense ratio of 0. It offers investors a good way to diversify other holdings that have more volatility and greater risk. Corporate Bonds for Your IRA Another option for an investor with higher risk tolerance is corporate bonds , which are issued by a corporation and backed by the ability of the company to pay its debt obligations.

The corporation can use its physical assets as collateral for the bonds, but this is not as common.

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