Buy and hold

When you buy bonds and hold them until they mature, you know from the start how much you'll earn in interest and when the principal will be repaid. Only two things can interfere with your expectations: If the issuer defaults, and fails to pay the interest or return the principal, or if the bond is called, which means the issuer redeems the bond early by paying back the principal.

That happens, most often, if the interest rate you're earning is higher than current market rates, and the issuer can save money by paying you off and issuing new, lower-paying bonds.

Alexandra Lebenthal, President and Chief
Executive Officer of
Alexandra &
James, Inc.

Words to the wise
If you’re considering a buy-and-hold approach, you should:

Investigate a bond’s rating before you buy, to evaluate the balance between risk and potential return.
Check a bond’s earliest call date, to determine how long the income is assured.
Weigh the importance of an insured or pre-refunded bond to your investment strategy.
Consider tax-exempt municipal bonds, including tax-exempt zero coupon bonds, to keep more of your earnings.

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