Bonds - For A Secured Future
Sometimes you can find yourself short of money when you need it. This could happen anywhere, at the coffee shop, for the cab service, or even in the office. Borrowing is usually the only option when you are short of money. If the same thing is applied to the federal government or big organizations, borrowing may not be that easy for them. These organizations not only have to repay the money, but also the interest on the amount. Which is why companies have to sign a legal bond, wherein they promise to repay the amount owed.
Certain criteria should however be taken into consideration before making any investments in bonds.
Before one decides to make any investments in bonds, it is important to ascertain whether it is for a short or long term. This can be decided on the basis of your investment goals, and the status of your taxes. Certain strategies should be taken into consideration before investing. For example, it is not a good idea to put all your risks and assets in a single category of assets. Diversification of the risks by the creation of a portfolio of a number of bonds is a better method. Investing in various issuers’ bonds will safeguard you in the event of one issuer not being able to pay back the owed amount.
Using a brokerage account is by far the most common way to buy bonds. One can either hire a discount broker or utilize a full-price broker to carry out the transactions. Since there are variations in the bond commissions charged by different brokerages, it is a good idea to look around before deciding on one. One can purchase anything, from a one-year junk bond issued by corporations on the brink of going bankrupt, to a 10-year treasury bond. One can either pick them from the secondary market or avail of the direct offerings, depending on the brokerage.
After the investment, a par value, or the amount the investor receives on the bond’s maturity, is computed. In other words, the principal amount owed is to be repaid to the investor. The bondholder receives a coupon rate as the percentage of the par value. Eventually, according to the maturity date, the lender gets back the principal amount from the bond issuer.
To calculate the yield of a bond, one can divide the amount of interest paid over the period of one year with the current price of the bond. Since there are frequent fluctuations in bond prices, therefore, the current price is considered. However, if one decides to sell prior to the maturity date, it is better to do it at the current market rate.
Types of bonds
There are different types of bonds that are available. For instance, corporate bonds, government bonds, mortgage-backed securities, municipal, agency, etc. Besides these, there are different maturity level bonds, which are also available. These bonds help in the management of the interest rate risk.
The US government treasury bonds have maturity dates ranging from 3 to 5 months up to 30 years.
Corporate bonds have high interest rates and are a little risky. These are sold through public security markets.
State and Local government bonds have higher interest rates, because, compared to the federal government, these bonds are more likely to go bankrupt.
It is difficult to buy foreign bonds, and they are usually bought as a part of a mutual fund. However, they are risky investments.
In conclusion, even if certain bonds offer a lower rate of interest, or might turn out to be risky, they are sound investments and can prove to be safe investment options in the long run. Acquiring a number of bonds also results in creating good credit ratings, which allows the owner to prove his or her financial stability.