Bond Investment Strategies
Saving for a Definite Future Goal
Because bonds have a defined maturity date, an investor holding a certain bond can predict, if s/he does not sell the bond, a date certain when he or she will be receiving principal and any interest income back.
For example, you can invest in zero coupon bonds with maturity dates timed to your needs. Zero coupon bonds are sold at a steep discount from the face value amount that is returned at maturity. Interest is attributed to the bond during its lifetime. Rather than being paid out to the bondholder, it is factored into the difference between the purchase price and the face value at maturity.
The value of zero coupon bonds is more sensitive to changes in interest rates however, so there is some risk if you need to sell them before their maturity date. You may want to consult a tax advisor or financial advisor to see if there are any strategies you can take advantage of that will have tax implications/benefits as well.
Since interest rates and market conditions can change over time, some investors may want to have more than just one bond with its defined maturity date. In that case, investors might use what is called a “bullet strategy” to save for a definite future goal. For example, if someone wanted to save and invest with more than one bond in order to have principal and any interest income back 15 years from now, in a bullet strategy an individual investor would buy a 15-year bond now, a 10-year bond five years from now, and a five-year bond 10 years from now. Staggering bond investments this way may help an investor benefit from different interest rate cycles.