When you're building a portfolio of bonds and bond mutual funds, you'll want to consider buying bonds with different terms. The term is the length of time between when a bond is issued and its maturity date, the date the par value of the bond is scheduled to be repaid.
The good news is that bonds are available in a variety of terms, from short-term U.S. Treasury bills, which currently come in 4-, 13-, and 26-week terms, to long-term bonds with maturity dates as long as 30 or 40 years. There is also a wide variety of intermediate-term corporate, government, and agency notes to choose from, which usually mature in two to ten years. In general, the longer the term the higher the rate of interest the bond pays to offset the risk you're taking in tying up your money.
One advantage of owning bonds with different terms is that you can use the principal that's repaid at maturity to take advantage of new investment opportunities as they arise. You can also choose maturity dates to coincide with a time you Know you'll need cash for a planned expense, such as a tuition payment or the down payment on a home.
If you stagger the maturity dates on bonds of the same term, an approach known as laddering, you can avoid having to reinvest all of your money at a single rate.
Don Kittell
