Index bonds have no maturity date and their value is determined by the current index rate. They can be open or closed and tax-exempt or taxable. They can be risky investments, but can be held for more than ten years. The minimum investment is $1,000 and can be purchased through approved agencies or brokers.
Many wise investors use a portion of their savings to buy financial securities called bonds. With this type of investment, an individual offers money to a financial institution or government agency in exchange for the bond. Usually, the bond has a maturity date, which determines when the investor can return the bond to the financial institution to collect the bond’s original cost, plus any accrued interest. An index bond is a specialty bond whose value is determined by the current index rate.
An indexed bond does not have a maturity date. If the index rate falls, the value of the bond also falls, but if the rate rises, the value of the bond rises.
An open indexed bond is one that can be moved from one area to another, such as in a 401k plan. A closed-index bond can be purchased in limited quantities, usually 100 shares, and can only be moved through a licensed broker. In both cases, the buyer can decide whether the security should be tax-exempt or taxable. If it earns interest, quarterly payments are sent to the owner.
An index-tracking bond can be a risky investment because index rates can go up or down without warning. A look at the Lehman 10-year bond index for 2006, for example, showed that the value was slowly declining each month. Only an open-ended bond can be held for more than ten years. A closed one must be managed by a broker, who receives a commission for any changes made. Therefore, many bondholders choose to hold the stock a few more years in hopes of seeing an improvement in rates before the sale.
There is a minimum investment of $1,000 in US dollars (USD) in this type of bond and it can be purchased through approved federal agencies or brokers. The service fee must also be paid at the time of purchase.
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