If you are planning to invest in a bond, you are probably asking yourself is it a safe investment. Well, bonds are known to be a safe investment portfolio, but in reality, investing in bonds can lead to some surprises. If you want to learn more about how safe bonds actually are, then we highly suggest that you read through this article.
What Types of Bonds Should You Avoid?
While there are many bonds that are considered safe, there are also some bonds are better to avoid. If you are an investor you should be focusing on some investment grade rated bonds. The bonds that are not so safe are so-called junk bonds, emerging market bonds or securitized product. You should avoid bonds that mature after 10 years because the longer it takes to a bond to mature the possibility for capital loss is bigger.
Why are Bonds Good for Income?
If you want to invest your money somewhere safe and have an income, then bonds are your best option. In this part of the article, we will be explaining to you the characteristics of some bonds. Generally speaking, bonds are known to be safer than stocks especially when dealing with investment grade rated bonds because the loss of equity is quite small. Bonds that are providing a major security and an attractive level of current income are usually issued by the government of the United States, U.S. agencies, and high rated corporations. Bonds offer regular income because of their periodic interest rate payments.
Bond issuers are also obligated by a contract to pay their payments, if they fail to do so the bondholder will bankrupt the issuer. That’s why bond issuers consecrate a lot of attention to the payment and make the payment number one priority. The fact that the bond issuers can bankrupt if they don’t pay is only further enhancing the fact that the bond buyers will receive the money on time. Corporate bond interest rate payments are in fact more stable and safer than company dividend payments.
They are more stable because companies are bounded by a legal contract to first pay interest on their bonds before any other payment. A lot of investment options that people have are usually with infinite life spans. However, bonds have specified maturity time. This means that the investor will know the exact date on which they will receive the payment for the bond.
The majority of people would not be able to afford expensive things such as a home, education or a car without taking a loan. Just like people, businesses also need to borrow money that will help them grow and succeed. They use that money on many things like to grow, move into the new market, or to found some operations.
Usually these things cost a lot of money and unfortunately, banks cannot provide such amount of money for a single business. At that point, businesses turn to their last option and that is to issue bonds. Bonds are nothing more than a loan if you want to know how the bond process is working then continue reading this article.
There are two sides of signing a bond contract. There is the side that is buying a bond and the side that issues it. First, we will explain the side that buys the bond. Buying a bond means that you will be lending money to the business that issues it. That business will in return sign a contract in which they promise to pay interest payment to you. We cannot give you information such as how often or how much will you get paid because it will only depend on the terms of the actual bond.
A different name for the interest rate you can find in some places is Coupon. Usually, the interest rate will be higher if the bonds are long terms. These payments are in most cases doled semi-annually, but sometimes they can be sent out even monthly. The original amount of the loan will be repaid when the bond matures. Now for the other side of the bond contract the issuer. In this case, you are the one in need of the money so you will be the one that is paying the interest rate semi-annually or monthly depending on the contract.
There are, of course, many different types of bonds such as Government bonds, Municipal bonds, Corporate bonds and more. Government bonds are known to be the safest investment especially the bond from the United States. These bonds can mature in different lengths, there are some that can mature in less than a year and there are some that take more than 10 years to mature and they are called treasury bonds. Usually, you with this bond you don’t have to pay income taxes.