How to Buy Bonds With Insurance

Insured bonds sound like an investor's dream on paper. If the company you bought the bond from defaults, then the insurance covers repayment of the principal and interest. For an investor, this means that an insured bond has little to no risk except if interest rates change. You should know how to find and buy bonds with insurance.

Instructions

Difficulty: Moderately Easy

Things You’ll Need:

• Stockbroker
• Bond prospectus

1. Research different types of bonds to find out the availability of insured bonds. The most frequently insured bonds are municipal bonds. Your broker should also be able to recommend some other short- and long-term insured bonds.
2. Figure out how the insured bonds will fit into your investment plan. These types of bonds will help you lower your portfolio risk, but they also have lower interest rates because the issuer must pay for insurance. You can buy low-yield bonds with insurance to help balance a high-risk portfolio.
3. Read the bond prospectus before buying insured bonds to find out more about the security. Most insured bonds will have a high (Aa and up) Standard and Poor Bond Ranking. If you are buying insured municipal bonds, remember that you'll also probably get a break on federal taxes.
4. Double-check the credit ranking of the bond's insurer. The name of the company that insures the bond can be found on the prospectus or the issuer's website. Stay away from bonds that are insured by companies with a less than excellent (A and below) credit ranking.
5. Give your broker your order for the insured bonds. Just like every other kind of security, you'll probably have to pay a transaction fee to cover your broker's commission. Remember that insured bonds decrease both your portfolio risk and your total profit, so be sure the size of your purchase helps your long-term investment goals.

Tips & Warnings

• The insurance on your bond only protects your principal if the company defaults on your bond. Your bonds will still be subject to failing interest rates and often start at below market rates.
• If you buy foreign bonds with insurance then you'll further diversify your investment portfolio without taking on too much risk. Remember that the credit ranking system could be different in a foreign stock exchange.
• The low interest rates of insured bonds often means that after deducting your broker's commission, you'll have no net gain or even lose money on that bond for the year. This can work in your advantage if you're trying to minimize your taxable income.