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What are Baby Bonds?

Posted By Miranda Marquit On 12/20/2012 @ 11:57 am In Investing | 1 Comment

One of the ways that you can diversify your portfolio is to add bonds to the mix [3]. There are a number of different choices when it comes to bonds. You can purchase bonds from the government, including foreign and city governments. Additionally, you can get bonds from corporations.

When many people think of bonds, though, they immediately think of U.S. Treasury bonds, often savings bonds, even though it’s possible to invest other types of bonds. It’s also common to think of bonds purchased in huge amounts, especially when it comes to institutional investors.

Average investors, though, can use bonds in their asset allocation [4] by investing in baby bonds.

How Baby Bonds Work

Basically, baby bonds are those issued in smaller denominations. Often, big institutional investors invest huge amounts of money. However, with a baby bond, the maximum face value of the bond is $5,000. And, in fact, many baby bonds are issued in denominations of $1,000 or less. While it’s possible to find these types of bonds in a variety of maturities, it’s quite common to find them maturing between eight and 15 years.

Baby bonds are often issued by entities that want to give more people the chance to invest. Municipalities might use them to help encourage more people in a local area to invest. In some cases, these types of baby bonds are actually structured as zero-coupon bonds.

Companies also use baby bonds to their advantage. Many small companies, fearing that they can’t attract the kind of big investment that comes with institutional investing, open it up to other investors. The principal of $1,000 or less is often used as a way to attract “ordinary” investors who might not have access to a great deal of capital. These bonds can help fund a small company, while providing an investor the chance for return.

Even though you can purchase bonds issued by the Treasury in smaller denominations, and even though when such a move was first introduced in 1935 the bonds were referred to as baby bonds, most of the time the term is applied to municipal bond and corporate bonds.

Purchasing Baby Bonds

In most cases, there are no commissions to purchase baby bonds. Often, purchase of baby bonds is made directly from the issuing source. If you are purchasing a baby bond from a city, you can usually go to the city treasurer’s office and buy one. The same is true of purchase from a smaller company. It’s often possible get baby bonds direct from the source without worrying about commissions.

While you can manage your baby bonds with the help of a service, you do not have to use a service. You can keep track of your own portfolio without too much trouble. Make sure that you keep straight where you purchased the bond, its face value, yield, and maturity date. You’ll want to make sure that you understand all the terms, and that you keep track of when interest payments are made to you, since not all baby bonds are tax exempt (although most issued by municipalities are).

As with all investments, carefully consider your opportunities, and determine what is likely to work best for you before investing in any bond.

(Photo: paparutzi [5])

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[3] add bonds to the mix: http://www.bargaineering.com/articles/bonds-safe-risky-investment.html

[4] asset allocation: http://www.bargaineering.com/articles/how-to-determine-your-asset-allocation.html

[5] paparutzi: http://www.flickr.com/photos/paparutzi/1062529940/

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