How to Invest in Debt Securities

Debt securities fall into one of three broad categories. Government bonds are debt issued by the U.S. government or have some sort of federal government support. Treasury bills, notes and bonds are direct government issues. Mortgage backed securities from Fannie Mae, Freddie Mac and Ginnie Mae have direct or implied underlying government guarantees. Municipal bonds are debt issued by state and local governments. The major feature of muni bonds is that they pay tax-free interest. Private and publicly traded companies issue corporate bonds. Corporates can be divided into investment grade bonds and non-investment grade bonds -- often called junk bonds.

New issue debt securities can be purchased directly from the U.S. Treasury. Open an account through the TreasuryDirect.gov website, link a bank account and you can enter orders for upcoming Treasury bill, note and bond auctions. The rates individual investors earn on Treasury securities are the same rates earned by the big institutions. The minimum purchase amount for marketable Treasury securities is $100 and purchases can be made in $100 increments. With a TreasuryDirect account you can also purchase Series EE and I savings bonds. A savings bond can be purchased with as little as $25. Outside of the TreasuryDirect system there is an active secondary market for the purchase and sale of Treasury securities.

Individual debt securities of all types can be bought and sold through an account with a bond dealer or broker. Most large brokerage firms also handle bonds. For municipal or corporate bonds you should work with an investment advisor who understands the bond markets and the types of securities that might fit your investment goals. Muni bond investors often work with dealers who specialize in local tax-free bond issues. Since they are marketable securities, bonds can be bought and sold after issue and before maturity. Advanced bond investment strategies involve finding bonds that could increase in value as well as pay interest.

Debt security investments can be made through the purchase of funds or unit trusts that invest in bonds. Fund types include mutual funds, closed-end funds and exchange traded funds, or ETFs. Unit investment trusts are investments in packaged bond portfolios with specific maturity dates. Investors who like to do their own research can invest through no-load closed end mutual funds. For investment advice, an investment advisor will provide guidance on mutual funds and unit trusts that sell for a fee, also known as a load. Fund companies offer funds covering the full range of debt security types.