A Bond's Term
A bond's term also helps determine its value. Depending on how soon you'd like repayment of principal and how much risk you're willing to take with your investments, you might want to purchase bonds with shorter or longer terms.
Short-term bonds usually have maturity dates of a year or less. They can carry a smaller amount of risk than longer-term bonds because they are exposed to changing market conditions for the least amount of time. However, because they sometimes pose less risk, interest rates are typically lower than bonds with longer terms. Intermediate-term bonds that range from two to ten years typically have higher rates than short-term bonds, but lower rates than long-term bonds, which have maturity dates of more than ten years. While a long-term bond's higher rate might make it attractive, the potential impact of inflation and change in market interest rates are important factors to consider. An advantage of having alternatives is that you can:
- Choose bonds that will mature at dates when you're likely to need money, like when you need to pay for your child's tuition.
- Stagger maturity dates, so you can help ensure that you'll have cash available when you need it. This approach, sometimes called bond laddering, also means you don't have to reinvest your entire principal at the same rate because your bonds mature at different times. That's especially helpful if rates are lower than you'd like.
- Diversify by buying some long-term and some short-term bonds, which offers the benefits of both and the possibility of spreading out some of the risk.