Turbulent conditions of the market are leading many investors to consider bonds as an option over stocks. Although bonds can contribute positively in a well-established portfolio, there are few important considerations that investors should take prior to investing.
In many cases bonds are viewed as the safe investment option but like any investment, bonds carry a few risks as well and these risks should be carefully gaged and not overlooked in any investment approach. The decision to invest is one that can result in positive return, but always enter the platform armed with as much knowledge as possible and this is true when investing in the bond market as well (U.S. Department of Treasury, 2016)..
If you have given thought to the idea of purchasing bonds for your financial portfolio, then it is important to understand that not every bond is the same. Therefore, what worked for your colleague or friend may not yield the same results for you. All bonds are categorized as debt instruments but established by a variety of entities for various purposes and also carry associated risks and liabilities. The breakdown is that bonds are supplied by companies and government platforms to finance their daily operations or fund special projects. Once an investor purchases a bond, he is lending money for a specific amount of time to the supplier of the bond. At the date of maturity for the bond, the investor obtains the principal amount, along with interest (Investing in Bonds, 2013).
At the time of issue, the face value of a bond is referred to as par value and coupon is the term used to define the payment of interest. Bond prices will change just as stocks during a day of trading. The coupon payment typically remains the same with a few having fluctuating rates occasionally. Bonds purchased “at” face value are termed “sold at par”, purchased “above” face value are termed “premium” and those purchased “below” face value are termed “discounted” (Investing in Bonds, 2013).
There are generally three main categories for bonds: Municipal, Corporate, and Government.
Municipal bonds are issued by local government and public sectors in an effort to satisfy financial needs. These bonds can be issued by public commissions, towns, cities and states to provide funds for hospitals, schools and other public platforms. These bonds produce income that is not subject to federal and in many cases state or local taxing (U.S. Department of Treasury, 2016)..
These bonds are in the higher risk category and are completely taxable. However, they do stand the chance to offer higher returns than those bonds that present tax breaks. They are supplied by corporations that need capital and generally produced in increments of $1,000 carrying terms of 1 to 30 years. Bonds don’t grant the investor ownership in the corporation, as they are only a source of funding supplied by the investor to help the corporation obtain their goals. It is essential that investors fully understand the quality of the corporation into which they are investing prior to investing in this type of bond.
This is the ideal bond type for investors wishing to assume minimal risks. These are supported by the U.S. government and often available in three types: treasury bills, notes and bonds. These securities generally mature in a year or less from the date of acquisition and are purchased at less than face value (U.S. Department of Treasury, 2016).
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Eric Lawrence Frazier, MBA
President and CEO