The Benefits of Bond Investing
A bond is a debt security through which the investor essentially lends money to a corporation, a municipality, a government organization. The bond “issuer” agrees to pay the lender a specified interest rate during the life of the bond and the repayment of the face value of the bond at maturity - when the bond comes due. Many personal financial advisors recommend that investors develop a diverse portfolio which includes bonds (along with stocks and cash). Because bonds typically offer a predictable stream of income and the repayment of principal, bonds can lend income and stability to any investor’s portfolio and can play a significant role in achieving overall financial goals.
The Benefits of Bond Investing
Financial Security: Bonds are often referred to as “fixed-income securities” because they usually offer interest payments to the investor (typically twice a year) along with the relative safety of principal
Portfolio Balance: While stock values can fluctuate, the inclusion of bonds can bring relative stability to a portfolio. Bonds are very liquid (easy to sell) and usually less risky than stocks.
Tax Advantages: Most bonds issued by state or local governments are exempt from federal income taxes and “treasuries” (bonds issued by the U.S. government) are exempt from state and local taxes. Some municipal bonds (“munis”) are “triple tax free” as they are free from city, state and federal taxes.
Points to Consider when Investing in Bonds
Investment Timeframe: Due to the risk of fluctuating interest rates, longer-term bonds (with maturities of 10 years or more) have inherently greater risk and, therefore, pay higher interest rates. This is because as inflation and interest rates rise, your bond becomes less valuable. Short-term bonds (with maturities of less than four years) pay the lowest interest rates.
Calculate the Yield to Maturity of a coupon bond
Income Yield: As with any investment vehicle, bonds offer a trade-off of risk and return. You need to determine how much risk you are willing to take in order to realize your desired returns.
Quality of the Issuer: It is important to understand the credit-worthiness of the bond issuer. Rating services like Moody’s and Standard & Poor’s can help you in this regard.
Search for Bond Investment Opportunities
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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