Think of the movie Goodfellas…

There's a scene where the mobster, Henry Hill, is explaining what happens when people borrow money from the mob. 

The answer is, no matter what happens, they have to make their interest payments. 

When you're holding a bond, you're Paulie.

Here’s another way to think about it…

You’re like the banker who holds a mortgage. And the company, like a homeowner, has to pay back the principal and the interest to you. 

If they don’t pay, they get “evicted” – in other words, they go out of business.

Which is why we love bonds.

They put YOU in charge. They put YOU at the top of the food chain.

They’re predictable money makers because the cash flows are predefined. 

See, when a company issues a bond, the company is now in debt – which it must pay off – in addition to the interest payments.

There are different types of bonds – such as treasury bonds which are issued by the U.S. government, or municipal bonds which are issued by local and state governments.

But we’re interested in corporate bonds.

These are tradable “loans” backed by companies.

The same legal structure that makes bonds relatively safe also makes them easy to understand and to value.

A bond has only two primary components. 

Generally, bonds are issued in the U.S. in $1,000 increments. A bond trading at "par" is quoted as being "100." That really means it will cost you $1,000 to buy it.

The second component is its coupon. 

The coupon is quoted as a fraction or a percentage. A $1,000 bond with a 6.5% coupon would pay its owner $65 per year in interest.

These coupons are generally paid twice a year – or sometimes more frequently, depending on how the bond is written. 

If the payments were made twice a year, you wouldn't get $65 twice. You'd be paid $32.50 in June and $32.50 in December.

As interest rates change, the prices of bonds will fluctuate. If interest rates go down, everything else being equal, the price of your bond will go up. That's because the coupon is fixed.

For the rate of interest to change, the bond price must change. 

But if you hold your bonds to maturity (when the principal is repaid), then these changes in price can be meaningless. You're still going to be paid back $1,000 per bond. 

That's a lot safer than owning stocks. As you know, stock prices bounce around for no apparent reason all the time…

Stocks can also be hard to value... which means it's possible to pay way too much for them when you buy, and it's possible to sell them for far less than they're worth.

A stock's dividend is also never guaranteed. 

CEOs can cancel or decrease dividends at the drop of a hat. As an equity holder, you’re entirely at the mercy of someone who may not have your best interests at heart.

Bondholders don't have to worry about their coupon payments being lowered. The coupon is legally required to be paid. Companies have to meet that obligation, or else the bondholders are entitled to certain underlying collateral.

If they fail to meet their obligations, it’s likely because the business is going bankrupt. 

But even then, as the bond holder, you can partially recoup your investment as the courts will force the company to pay its debts.

Typically, this involves selling off underlying assets such as equipment, property, land, intellectual property, along with everything and anything else that can be auctioned off for cash.

As the bond holder, you are entitled to this money. 

It won’t be enough to cover your entire investment, but it’s better than a kick in the teeth with bond holders seeing an average of 40 cents on the dollars.

This legal protection is just another one of the many reasons we love bonds at Porter & Co. and why they’ve long been Porter’s favorite way to maximize his investment returns while reducing risk.

Before you invest in bonds, however, it’s important that you fully understand how the market functions…

It’s simple to buy stocks these days with all the online brokerages and apps.

That’s not the case for buying bonds. 

But there are good options for you. Depending on your brokerage, you may or may not be able to buy the bonds you’re looking for online…

If not, you’ll need to call your brokerage and have them execute the trade for you. If you work with a full-service broker, you will work directly with someone from the brokerage, usually over the phone.

Full-service brokers can be great at providing additional research or advice that’s specific to you.

Sure, this can be a little daunting the first time. But once you get the hang of it, it’s simple. (And don’t worry, we’ve give you a simple script to follow if you do need to call your broker).

When you call your broker, they will tell you whether the bond you’re looking to buy is available to them. 

Sometimes the bond won’t be available to the broker because the bond market is much less liquid than the stock market…

When you speak to your broker, ask him for the current market price of the bond you’re looking to acquire, and they will give you the bid offer. 

The bid offer is what you’ll be paying and then tell him how many bonds you’d like to buy.

The process for buying bonds varies depending on your broker. Some brokerages may need additional documentation, or require you to be approved for bond trading.

We recommend being comfortable calling your brokerage firm or the fixed-income specialist who will help you get quotes.

These specialists will analyze the prices on the market and check what the dealers are asking for the specific bond you’re looking for. 

Most brokerage firms will charge a $1 commission for every time you purchase or sell a bond (check your brokerage firm for minimums or fees).

Charles Schwab, Fidelity Investments, E-Trade, Interactive Brokers, and TD Ameritrade are all reputable firms who allow you to invest in bonds online.

Each has a slightly different fee structure, minimum account size, and purchasing process so be sure to review each brokers individual brokers terms and conditions.