Where should I put money I need in 5 years?

[kork13]

I've never really looked into buying individual bonds, but are there any corporate or muni bonds available with a 3-5 year term? I believe the standard is 10 years, but if you can find some for reasonable terms with a good rate, why not just buy and hold (to full term) a few individual bonds?

Otherwise, I would personally look at I-Bonds or possibly a high-yield stock MF or ETF (obviously carries more/different risks)... But that's just me.

[disneysteve]

I've never really looked into buying individual bonds, but are there any corporate or muni bonds available with a 3-5 year term? I believe the standard is 10 years

You could buy a bond on the open market that matures in 4-5 years regardless of when it was originally issued. As long as the rating is good and the interest rate is what you are looking for, it doesn't matter when it was issued. As long as you hold it until maturity, you'll be fine.

[bjl584]

I was always one to pay extra on my debt but now that the highest interest rate on our debt is a mere 2.2% I am starting to think that I should invest instead of paying extra on the debt.

With that said, can anyone recommend something to invest in from Vanguard? 5 years isn't all that long so I am leaning towards something with a bit less risk but I would like to make ~5+% interest. What do you think about the bond market?

Thanks for your help and let me know if I forgot to mention something important.

For 5+ % interest you will need to take risk in today's environment. Here's a link to a high yield bond fund with a decent track record, low expenses, and a 8% annual dividend yield paying monthly.

PAXHX Quote - Pax World High Yield Bond Fund - Bloomberg

You do stand the chance at taking a loss, but it has a good 10 year track record. Just something to look into.

[kv968]

Wait a second. I just checked and those numbers aren't correct for VBTLX.

Average maturity is 7.1 years.
Average duration is 5.1 years.

You were looking at VBLTX.

Oops, sorry about that Steve. Dyslexia strikes again

[kv968]

You could buy a bond on the open market that matures in 4-5 years regardless of when it was originally issued. As long as the rating is good and the interest rate is what you are looking for, it doesn't matter when it was issued. As long as you hold it until maturity, you'll be fine.

You could definitely do that but you have to look at more than the bond's coupon rate because you most likely won't be getting that exactly. If you're buying a bond on the secondary market and plan to hold it until maturity you have to look at the current yield and yield to maturity (YTM) not just the coupon rate. If the bond is trading at a premium (which most are) you won't be getting the true coupon rate and will lose money when it matures.

For example, GE has a bond that matures in 2017 and has a coupon of 2.9%. However it's trading at $106.50, has a current yield of 2.7% and a YTM of 1.36%. So if you were to buy the bond at it's current price, you'd effectively get 2.7% in interest payments per year and if you were to hold to maturity it would figure to be 1.36% since you'd take the $6.50 loss when it matures.

[jpg7n16]

5 years isn't all that long so I am leaning towards something with a bit less risk but I would like to make ~5+% interest.

Yeah, that's just not gonna happen. The 5 year space is yielding maybe 2-3% on a good day. And that's for lower investment grade. Higher investment grade is 1-2%.

The 5-year Treasury is at 0.77% as of today.


So there is no such thing as something with less risk that yields 5% guaranteed for 5 years. The bond funds mentioned above are currently yielding that much, but if rates start to rise, the NAVs will start to fall and eat away your returns. On the same note, if rates continue to fall, the fund's NAV will continue to rise. That volatility is risk.


If you need all the funds in 5 years, look into 5 yr zero coupon bonds.

If you want all the funds in 5 years, but can tolerate some risk, look into a short-mid term bond fund, or construct a portfolio with say 20-30% stock allocation, 10% cash, and the rest in mid term bonds.

[dontgopoor]

Quickly reading through the posts, I saw no mention of default risk; Unless you can afford the loss as part of a large, diversified portfolio, you may want to avoid municipal bonds in the current environment. If you're very conservative you may also want to avoid all but the most stable banks.

If you want to park $ that you are certain you will not need for a specific period of time, look into a high-grade corporate bond.

Even short-term/duration bond funds can still take a capital loss when int rates nudge up. And right now there's very little room to go down. The article at this [URL="http://www.fool.com/personal-finance/saving/2008/02/19/dont-fall-for-short-term-bond-funds.aspx"]link is a little old but has timeless advice.