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.