How to Buy Bonds

You can buy bonds from the bond market via a broker, through an ETF or directly from the U.S. government. Corporate, government, municipal, and zero-coupon bonds are four important types of bonds.
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Nerdy takeaways
  • Bonds can be bought through a broker, an ETF or directly from the U.S. government.

  • Buying and holding to maturity is one strategy for investing in bonds. Another is to sell early and make a profit.

  • Before you buy, be sure to check the bond's rating to learn about its financial health.

MORE LIKE THISInvestingBonds

Bond investments are one way to invest, by lending a company or government money rather than buying a stake (like stocks).

Many financial planners advocate investing a portion of your portfolio in bonds because of their lower volatility and relative safety compared with stocks. A quick way to get exposure is with bond funds, either mutual funds or exchange-traded funds (ETFs), which investors can purchase through most major brokerages.

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Where to buy bonds

Buying bonds on the bond market can prove trickier than buying stocks because of the initial amount required to begin investing. While the face value of most bonds is $1,000, there are ways to buy bonds for less. The easiest ways to purchase bonds are through a broker, an ETF or directly from the U.S. government in increments of $100.

A broker

You can buy bonds through an online broker — learn how to open a brokerage account to get started. You’ll buy bonds from other investors looking to sell through this approach. You may also receive a discount off the bond’s face value by buying a bond directly from the underwriting investment bank in an initial bond offering.

» Ready to get started? View NerdWallet's picks for the best brokers for bonds

An ETF

An ETF typically buys bonds from many different companies, and some funds focus on short-, medium-, and long-term bonds or provide exposure to specific industries or markets. A fund is a great option for individual investors because it offers immediate diversification, and you don’t have to buy in large increments.

» Learn more: How to buy bond ETFs

Directly from the U.S. government

The federal government has set up a program on the Treasury Direct website so investors can buy government bonds directly without paying a fee to a broker or intermediary.

🤓Nerdy Tip

A bond’s term refers to the length of time until the bond matures. One important difference between short- and long-term bonds is that longer-term bonds tend to offer higher interest rates due to their greater interest rate risk. In other words, it’s more likely that long-term bonds will be exposed and sensitive to interest rate changes over a longer time period.

What to watch for when you buy bonds

There are two ways to earn income when investing in bonds. One strategy is to buy and hold the bond until it matures and then collect the principal and interest.

Use the following three-step process to evaluate whether various bonds fit your portfolio:

1. Can the borrower pay its bonds?

The answer to this question is paramount because if a company can’t pay its bonds — its promise to pay back money lent with interest — there’s no reason for the average investor to consider buying them. With some sleuthing, you can estimate whether the company can meet its debt obligations.

Bonds are rated by ratings agencies, with three big ones dominating the industry: Moody’s, Standard & Poor’s and Fitch. They estimate creditworthiness, assigning credit ratings to companies and governments and the bonds they issue. The higher the rating — AAA is the highest, and it goes down from there, like school grades — the greater the likelihood the company will honor its obligations and the lower the interest rates it will have to pay.

» Feeling sustainable? Learn about green bonds

Corporate bonds

Beyond ratings, the quickest way to determine the safety of a company-issued bond is by looking at how much interest a company pays relative to its income. Corporate bonds generally pay higher interest than government bonds because they have a relatively higher risk of default. Like a homeowner paying off a mortgage every month, a company that doesn’t have the income to support its payments will face trouble eventually.

Start with the company’s most recent annual operating income and interest expense, found on a company's income statement. This info is available for every U.S. publicly traded company in a 10-K filing, on a company's website or in the EDGAR database on the U.S. Securities and Exchange Commission's website. Operating income differs from net income because it factors out interest payments (which are tax-deductible) and taxes and is the best measure of a company’s ability to pay its debts.

Government bonds

Evaluating government-issued bonds is trickier because governments don't typically carry huge excess revenues that indicate stability. The good news? Government bonds generally are safer for investment, with those issued by the U.S. federal government deemed the world's safest. However, in 2023, ratings agency did Fitch downgrade U.S. long-term debt from AAA to AA+, citing concerns over "repeated debt limit standoffs and last-minute resolutions," among other factors

.

U.S. government bonds are often referred to as Treasury Bonds or T-bonds. They’re so safe that investors refer to the government's interest rate as the "risk-free rate." As a result, government bonds do not usually offer higher interest rates, given the low risk of default. Two exceptions are Treasury Inflation-Protected Securities (TIPS) and I bonds, whose interest rates are adjusted regularly based on inflation. I bonds offered rates above 5% as of Feb. 20, 2024

TreasuryDirect. I bond interest rates. Accessed Feb 20, 2024.
, and will be next updated on April 30, 2024.

Municipal bonds

Though they've also been safe historically, bonds issued by cities, states and municipalities are not quite as rock solid. You can investigate these bonds further on the Electronic Municipal Market Access (EMMA) site, which provides a bond's official prospectus, an issuer's audited financial statements and ongoing financial disclosures, including payment delinquencies and defaults.

A government's credit rating is an excellent first guide to its creditworthiness, and you can follow up to see if there are any recent defaults or other financial issues that might cause a future default or delinquency. Another benefit: Income from municipal bonds is generally tax-free at the federal level and sometimes even at the state level if you purchase them in the state where you reside.

Zero-coupon bonds

Zero-coupon bonds are bonds that do not pay interest and are known as “deep discount” bonds. They’re sold at a reduced price compared to their face value, and investors profit when the bond matures. Treasury or T bills are examples of zero-coupon bonds.

2. Is now the right time to buy bonds?

Once a bond’s interest rate is set and made available to investors, the bond trades in what’s called the debt market. Then, prevailing interest rates dictate how the bond’s price fluctuates.

Bond prices tend to move countercyclically. As the economy heats up, interest rates rise, depressing bond prices or even causing the bond market to crash as it did in 2022 and 2023. As the economy cools, interest rates fall, lifting bond prices. You might think bonds are a great buy during boom times, when prices are lowest, and a sell when the economy starts to recover. But it’s not that simple.

Investors try to predict whether rates will go higher or lower. But waiting to buy bonds can amount to trying to time the market, which is not a good idea.

Many bond investors “ladder” their bond exposure to manage this uncertainty. Investors buy numerous bonds that mature over a period of years. As bonds mature, the principal is reinvested, and the ladder grows. Though laddering may come at the cost of lower yield, it effectively diversifies interest-rate risk.

3. Which bonds are right for my portfolio?

The type of bonds that are right for you depends on several factors, including your risk tolerance, tax situation, time horizon and when you need income from these bonds.

A good bond allocation might include each type — corporate, federal and municipal bonds — which will help diversify the portfolio and reduce principal risk. Investors can also stagger the maturities to mitigate interest-rate risk.

Diversifying a bond portfolio can be difficult because bonds typically are sold in $1,000 increments, so building a diversified portfolio can take a lot of cash.

Instead, it’s much easier to buy bond ETFs. These funds can provide diversified exposure to the bond types you want, and you can mix and match bond ETFs even if you can’t invest a large amount at once. Broadening your exposure also decreases the risk you face by not placing all your eggs in one basket.

Invest in bonds: next steps

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