What you need to know about bonds

admin March 29, 2023
Updated 2023/04/01 at 6:09 PM

Bonds are a form of debt security where investors lend money to companies or governments. The government or company promises to repay the investment, principal and interest over a specified period. The debtor’s maturity date is when the bond expires. 

However, investing in bonds is much more complicated than buying Treasuries. Before you can make informed decisions about whether to hold them or sell them, it is important to fully understand the complexities of bonds. 

Bonds can be used to diversify portfolios and reduce volatility from equities. If you keep them until maturity, they provide income and all coupon payments can be reinvested at the same rate. 

Although they are more risky than stocks, their returns may be higher. They are also less volatile than equities, and have a better long-term growth potential. 

There are many options for buying and selling bonds. These can range from individual transactions to professional managed mutual funds or exchange traded funds (ETFs). Before investing in bonds, you should be familiar with their terms and how they are used in your portfolio. Also, what the risks and benefits of each bond. 

What you need to know about the terms and terminologies of bonds 

When discussing bonds, the terms are similar to other investments like equities and commodities. These terms include the issuer, coupon, face value, maturities, and the coupon. 

Bonds cannot be traded on the stock market, but they can be sold to your financial professional. They can be purchased through a broker or an exchange-traded mutual fund directly from the U.S Treasury. 

These bonds are typically issued by governments, corporations and other entities. However, some non-profits, municipalities, and certain municipalities can be conduit borrowers. Conduit borrowers such as hospitals and universities do not have the obligation to repay their bonds if they are unable to meet their obligations. 

Bonds are generally more long-term than stocks, as they mature earlier and can be repaid by the government or company. This also means you can earn more interest, but take on additional risk if your interest rate goes up too fast. 

Although the maturity dates can be different, they all follow the same rules. They can be short-term (one-to three years), medium term (over 10 years), and long-term (30 years). 

Ratings can be used to assess the creditworthiness and risk of bonds. A bond’s rating is a measure of its creditworthiness and the likelihood that it will default. Avoid bonds with low ratings as they are at highest risk of default.

When purchasing a bond, inflation risk is a significant factor. Investors lose their purchasing power if inflation is greater than the fixed income of a bond. 

Bonds can also be costly to purchase and decrease in value over time. These risks make it a good idea to buy them in small amounts, hold them for a while and then sell them. Talk to your financial advisor if you are uncertain whether bonds are a good investment.

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