Bonds InvestingYou have heard of credits and loans. These things are very important for you. Lending institutions will lend you money, and in turn, pay them back later, more often than with interest. You wonder about the time when it will be you who can lend money and not the one who’ll borrow it. Actually, you can. Investing in the bond market is basically just like that. When you invest in bonds, you basically lend your money to another party, and after a certain amount of time called a “term,” you will get your money back—with interest, of course. Imagine yourself lending money to the government or a large corporation, now that is some feeling. Bonds investing is a relatively sure way to earn profit. Bond investing is especially going to be prevalent today because corporations will be needing investors primarily due to the global financial crisis. “My Name is Bond, Just Bond”A bond is specifically defined as a dept security, where the bond investor will basically lend money to a corporation, who issues the lender a bond. In bond investing, the buyer of the bond is the debt issuer as the bond seller is the one who will receive the debt. Bonds investing is basically like loaning money to a friend, only that it is more formal, and that the debtor is required to repay the borrowed money with interest and after fixed intervals. The end of that interval is the end of the term of the bond, or in other words the end of the life of a bond, also called bond maturity. Bond investing can be short-term, where the bond matures in a year or two, intermediate-term, where the bond will mature after two to three years, and long-term, where a bond can have a life for up to thirty years or more. Kinds of BondsThere are quite a number of types of bonds where you can invest on, depending on the terms and who issued them. Fixed rate bonds have, well, fixed rates, and have constant interest rates throughout the term of the bond. Generally in bonds investing, the longer the life of bond is, the higher the interest rates will be. The perpetual bonds, or perpetuities, is another exemption to the general bonds investing rules, for perpetuities have no maturity. The municipal bond is a state or local government issued bonds. In bonds investing, these bonds are usually deemed the safest because they are backed by the government. An advantage of municipal bonds is that they can be tax free, therefore reducing the bearers tax liabilities. Stocks vs. BondsAs both securities, the mechanism for stocks and bonds are generally the same. However, there are also major differences between the two. For one, when you become owners of stocks or stock-holders, you become part owners of the company that sold you the stocks. However, in bonds investing you are merely lending money to the institution that sold you the bonds. Another one is of course, in bond investing, the bonds have a life or maturity, or at least in most cases, whereas stocks have none. Generally speaking, stocks can give you more profit. However, bonds are better in terms of risks and therefore more dependable. In bonds investing, the capital of the debt issuer will be preserved by the company. This cannot happen in stocks, as the stock-holder is basically part owner of the company, they will go down when the company goes down. Your investment in bonds, unless of course, the company who sold you the bond goes bankrupt, will always be safe. Bonds investing is a low-risk investment, and though it may not profit as high as the other debt securities, you are safer in bonds and you are more sure to earn your money back—with added interests, of course.
Bonds Investing
April 3, 2010
