Why You Should Invest in Bonds

A bond is a debt security that is sold to the public in set nominal values. Basically, it is interest-bearing money people lend to institutions such as the government or private firms. The interest rate is usually fixed, which means that no matter who holds the bond, the amount of income will remain the same. A bond is objectified by a piece of paper stating the principal amount that was borrowed, the agreed-upon rate of interest, and the term/maturity of the bond.

 

 

Bond investing operates on a simple basis. By purchasing a bond from the government, the bond bearer lends them money in exchange for receiving a fixed monthly income equivalent to the rate of interest times the principal amount. The bond bearer continues to receive interest until the bond matures, wherein he/she will get back the face value, or principal amount.

 

 

There are several types of bonds to choose from, all depending on whom you want to purchase a bond from. There are treasury bonds, municipality bonds, corporate bonds and bonds from other established government agencies.

 

 

Treasury bonds are called such because they come from the US treasury. They have varying maturity rates, ranging from 3 months to 3 years. People have faith in treasury bonds because they are guaranteed by the US government and does not require any income or local tax.

 

 

Municipality bonds are sold by local government. They have a comparatively lower interest rate as compared to other bonds, but people still buy them for tax-waiving reasons. When citizens purchase a bond from the state government, their taxes to the Federal government are waived. Sometimes, if the bond is of a high amount, states sometimes offer to waive even local taxes. This feature is very attractive to people with high income brackets because they pay less in the long run.

 

 

Government agency bonds, sell bonds that are supported by the federal government, so people still find some form of reassurance when purchasing bonds from them.

 

 

Lastly, corporate bonds offer higher, more appealing interest rates than the other government-oriented bonds. This is because unlike the government, corporations run the risk of becoming bankrupt, so they must make their bond propositions more competitive in order to sell more debt.

 

 

People invest in bonds because it is a sure and direct way to profit from investing money. It allows a steady income to supplement other businesses ventures. Additionally, for most businesses, financial advisers highly recommend having bonds in any businessman’s investment portfolio, for diversity’s sake. Bonds are stable, dependable ways to keep money coming in, whatever the goal is. Be it savings for a child’s education, or to finance a housing loan or to fund a retirement plan, people trust bonds to push through with their goal.

Written by admin on November 29th, 2007 with no comments.
Read more articles on Bond Basics and Buying and Selling Bonds.