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. However, they can be risky investments as index rates can rise or fall without notice. The minimum investment is $1,000 USD.
Many prudent investors use a portion of their savings to purchase financial securities called bonds. With this type of investment, an individual delivers cash to a financial institution or government agency in exchange for the bond. Typically, the security has a maturity date, which determines when the investor can return the bond to the financial institution to collect the original cost of the bond, plus any accrued interest. An index link is a special link for which the value is determined by the current index rate.
An index bond does not have a maturity date. If the index rate plummets, the value of the bond also decreases, but if the rate increases, the value of the security increases.
An open index 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, typically 100 shares, and can only be moved through a licensed broker. In either case, 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 bond can be a risky investment because index rates can rise or fall without notice. A look at the Lehman 10-year bond index for 2006, for example, showed that the value slowly declined each month. A bond can only be kept open for more than ten years. A closed one must be handled by a broker, who receives a commission for the changes made. Therefore, many bondholders choose to hold the security for a few more years in the hope of seeing an improvement in rates before selling.
There is a minimum investment of $1,000 United States Dollars (USD) in this type of bond, and it can be purchased through approved federal agencies or brokers. Payment of a service fee must also be made at the time of purchase.
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