The Basics of Bond Investments

If you are thinking about trying your hand at investing, then you may be interested in bond investments. You have probably heard about bonds, but you still may be unsure as to what they truly entail. Bonds can actually be a pretty nifty tool to help you grow your saving and increase your financial standing. What you do, is act as a lender to a government issuer, who is obligated to pay you amounts each month based on the bond’s interest rate. Once the bond reaches its due date, the issuer will pay off the principal value of the bond.

Types of Bonds

That being said, there are different types of bonds, which can muddle things a bit. For example, an individual may choose to invest in municipal or corporate bonds, a national or international government security, mortgage securities, or securities from a federal agency. As if that weren’t enough, bonds sometimes take the name of “debt securities,” “debt obligations,” and “notes.” It is important to remember that it is not advisable to invest solely in bonds. Portfolio diversification is important, so a combination of bond, stock, and cash investments would serve you well in maintaining more financial stability.

Benefits of Investing in Bonds

Many individuals turn to bond investing because the issuer will pay you on a semi-annual basis, meaning that there is at least some kind of predictable payment coming to you during the year. Considering that it is getting harder and harder for people to invest in their retirement, bonds have become one way that individuals can be sure that there is something going towards retirement each month. Many times, grandparents will use bonds as a way to save for their children’s future or to pay off existing debt.

Before You Invest in Bonds

While bonds can be a good idea for many people, it is always important to think long and hard about how you’re going to make the investment. Different bonds come with different value amounts, and as many people know, the higher the risk the higher the reward. The longer you hold onto a bond, the more risk there is that it will be sold at discount value, or less than principal value. If you have a bond for a short period of time, you are more likely to receive the principal amount. Moreover, the interest rates for a bond can vary, from fixed-rate to floating.

If your bond has a fixed interest rate, then that amount will be determined when the bond is first issued. Furthermore, depending on the type of bond you have, changes in interest rates will affect that bond differently. So there are quite a few considerations to make before jumping onto the bond bandwagon.