Think of a bond as you would an IOU. It is one of the types of investment that falls under debt securities. These securities are usually issued by borrowers who need to raise capital for business or public service purposes.
As an investor, you agree to lend the borrower some money for a specified period. And in exchange, you will get a preset amount of interest until the bond matures. After that, you will also get back your capital or principal.
Why Invest in a Bond?
Bonds tend to be stable forms of investments. In addition, they also carry lower risks compared to other types of assets, such as stocks. At the very least, they will preserve your principal. However, you will also receive interest regularly until the bond matures.
Bonds tend to have maturity periods of five to 30 years, depending on whether you opt for notes, regular bonds or Treasury Inflation-Protected Securities (TIPS).
However, Treasury Bills have a maturity period of 52 weeks or less. So, these investments are worth considering when you have money you will not use soon. You can lend it to the government or a corporation and allow it to generate some interest for you.
Sell Bonds Before Maturity
The ultimate goal of investing in bonds is to preserve your principal, which you would then get when your investment matures. However, life tends to get in the way and may necessitate that you liquidate your assets earlier. In that case, you could sell your bond before maturity.
1. Can You Sell Bonds at any Time?
You can sell a bond before its maturity period. However, you cannot sell it at any time.
For you to get the chance to cash in your bond at its current value, you must wait until it hits the one-year mark at least. But it would be best if you wait at least five years since you invested in it. Otherwise, you risk losing about three months’ worth of interest.
2. What Are Risks Associated With Selling Bonds Early?
Not only do you risk missing out on a few months of interest if you sell before the five-year mark, but you may also lose out in other ways.
If you were to wait until the bond matures, you would receive the par value, which is the principal you invested in addition to regular interest. However, if you sell the bond in a secondary market, you will get the market value, which investors are willing to pay for your bond due to prevailing circumstances. And that may not necessarily be as much as what you invested. Also, you will lose out on interest.
For example, if you purchased your bond when the interest rates were low but tried to sell it when the interest rates are high, your bond will likely have lost some of its value.
Also, if there have been legislative changes that do not favor the types of investment you made, or the borrower has begun to experience issues since you invested in the bond, it may be more difficult to liquidate that bond. Investors will be more reluctant to buy it and may offer less than you expect.
In addition, when selling bonds before maturity, you may need to pay a broker. Your broker will either take a commission or reduce your bond’s sale price to cover the transaction costs so they also make money. However, you can also deal with the U.S. government directly and cash in your bond.
It is also worth noting that you may need to pay federal and state taxes on some of the bonds you sell due to the income or gains you make. In addition, you will likely pay taxes on capital gains. But the rate depends on how long you hold the bond before selling.
3. How to Calculate Your Bond’s Value
When selling a bond before maturity, calculations are in order. They will help you estimate how much you are likely to get for your investment.
For paper bonds, you can use an online calculator to get the value, which will largely depend on the denomination, series and issue date you enter.
How to Cash In Bonds Before Maturity
You can cash in your paper savings bonds and take them to your local bank. All you need to do is follow the instructions on the TreasuryDirect.Gov website.
It would be best to log into the TreasuryDirect.Gov website and follow instructions within your account to cash in your electronic bonds. After two business days from the redemption date, you will receive the money in your checking or savings account.
Filling in Form 1522 will also enable you to liquidate your bond. The form also provides you with the physical address to which you can mail it.
You can sell bonds before their maturity date. But since doing so has several risks, you may want to liquidate other types of investment first to meet your financial needs. However, the sale of bonds is an excellent move if you do not want to incur debts, so it’s worth considering.
- Investor.Gov: Bonds
- Time: Is It Time to Cash in Your Savings Bonds?
- MSRB.Org: What to Expect When Selling Municipal Bonds Before Maturity
- Investor.Gov: Bonds, Selling Before Maturity
- Investor.gov: Bonds, Selling Before Maturity
- TreasuryDirect.Gov: Calculate the Value of Your Paper Savings Bond(s)
- TreasuryDirect.Gov: Cashing Paper Savings Bonds
- TreasuryDirect.Gov: FS Form 1522
- TreasuryDirect.Gov: Cashing (Redeeming) EE and E Savings Bonds
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