Your Questions About How To Invest In Bonds

William asks…

Ginnie Mae bonds invest program and the federal government?

Explain the Ginnie Mae bonds invest program with the federal government and how it works. What are the minimum requirements to be involved in the program and other factors involved?

John answers:

What Is a Ginnie Mae?

The Government National Mortgage Association (GNMA) operates as an agency of the U.S. Department of Housing and Urban Development.

It buys home mortgages from the financial institutions that made these loans and groups them into pools of $1 million or more. Ginnie Mae either keeps these pools to sell directly to investors or sells the pools to mortgage bankers and other institutions, which market them to investors.

Ginnie Mae or the mortgage banker continues to collect mortgage payments from the homeowners in each pool, and when you invest in a Ginnie Mae, you usually receive a monthly payment that includes both interest and a portion of the outstanding principal. Alternatively, you may receive monthly payments including only interest, and then receive the principal back when the mortgage matures.

These government agency bonds are also sometimes called Ginnie Mae pass-through securities, since the mortgage payments pass through a bank, which takes a fee before passing the remainder of the payments to investors.

Besides providing a higher return than Treasury notes and having the U.S. Government’s backing against default, Ginnie Maes have another advantage: they are highly liquid and can be resold on the secondary market.

The minimum investment for a Ginnie Mae is generally $25,000. Thereafter, the securities are available in increments of $1. Of course, you sometimes can buy Ginnie Maes that are selling for less than $25,000 at a discount on the secondary market, if their interest rates are low compared to more recent issues or if their principals have been substantially reduced. Finally, you can purchase shares in Ginnie Mae mutual funds for less than $25,000. Ginnie Mae funds or investment trusts buy these government agency bonds and offer shares to the public.

In addition to individual investors, a wide variety of organizations buy Ginnie Maes–for example, retirement pension funds, credit unions, real estate investment trusts, commercial banks, insurance companies, and corporations. Likewise, many different types of institutions issue Ginnie Maes–including mortgage companies, banks, and credit unions. Ginnie Maes are readily available and easy to add to your portfolio.

Laura asks…

What is the best way to invest in bonds in a taxable account?

My goal is long-term growth because I have a stable and highly paid job. I want to use bonds to diversify my stock portfolio. Quality (low default rate), low cost, and tax efficiency are the most important to me.

I’m considering Vanguard or Fidelity bond index funds for their low cost and diversification.

I’m also considering IBond (US Saving Bond Series I at TreasuryDirect.gov) for its tax deferral, tax-exemption when redeemed for my education, and guaranteed principal plus interests at maturity.

How do you invest in bonds in your taxable accounts? Why?

John answers:

Tax-free municipal bonds. There are some Vanguard funds that have these.

Michael asks…

Maria wishes to invest in bonds which pay 6% annual dividends. How much (please read a little more detail10pts?

How much must she invest in order to realize $2,120 at the end of the 1st year?

John answers:

Let P= the investment
i=the annual dividend
at the rate of 6%

P+i after one year=$2120

First solve for the divident i:

i=P*6%

Subsitute in the formula given above:

P+P*6%=2120
P(1+6%)=2120
P*1.06=2120
P=2120/1.06
P=2000

Check:

i=2000*6%
=2000*.06
=120

P+i =2000+120
=2120

Chris asks…

Finite Math question about investing bonds?

A couple wants to invest up to $60000. They can purchase a type A bond yielding 8.25% return and a type B bond yielding a 12.75% return on the amount invested. They also want to invest at least as much in the type A bond as in the type B bond. They will also invest at least $30000 in type A and no more than $40000 in type B bond.
How much should they invest in each type of bond to maximize their return?

(I have answered all of the questions i need to except this one, i have no clue. Any help would be greatly appreciated!)

John answers:

With Bond B having more of a return, and with the investment limitation of 30k into the bank, I would invest $30k in both A & B.

Mandy asks…

When 2 invest in bonds & how 2 use them as barometer of economic health with relation to share topics?

John answers:

When you begin investing, you should invest in bonds first because they are less volatile.

Then, when you have saved enough to invest in a stock mutual fund, you should add that.

You should always keep your investments split between bonds and stocks because the stability of bonds balances the volatility of stocks.

A 75% stocks and 25% bonds allocation gives good results if you are 5 to 10 years away from retirement. If you are within 5 years of retirement, you should have a 50-50 split. If you are retired and drawing down your investments, you should have 80% bonds and 20% stock.

If you are investing for a particular purpose, such as a house downpayment or college education, 5 years before needing it, you should move your money out of your stock and bond investments in proportion to your allocation. The money should then be put into bonds because they are less volatile.

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One Response to Your Questions About How To Invest In Bonds

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