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Are Bonds Really a Smart Investment?

By StreetShares on May 18, 2018

Photo courtesy of JHerbstman on WikiMedia Commons

What do you know about bonds? Not James Bond, investment bonds. If you guessed "something having to do with the stock market," you're on the right track but not completely there!

When you invest in stocks, you know that you own a piece of the company’s value. When the demand for that stock increases, the market value goes up. If you sell when the market value is high, you make a profit.

When you invest in bonds, they are much like loans with you acting as the bank. You get a certificate showing that a business, city, or government owes you money to repay you for your investment in their spending on growth, equipment, construction, and other projects. When your bonds mature, you can cash them in for more than you paid for them.

So what does that mean for you? Are bonds a good investment option or will your money work harder somewhere else? Keep reading to find out!

Common Bonds

When you invest in a common bond, you agree to hold the bond for a set period of five or 10 years. The provider then agrees to pay back your investment plus a yield or interest rate. As a simple example, you can buy an EE Savings Bond with a face value of $5,000. You pay $2,500 for the bond and cash it in for $5,000 when it matures in 10 years.

See also: Take the Road Less Traveled: 8 Awesome Reasons to Start Alternative Investing Today

As stock markets become volatile, bonds can offer a steady income. Here are a few other important notes to consider:

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  • Treasury Bonds are underwritten by the “full faith and credit” of the United States government. They pay low interest rates because they are so safe.
  • Junk bonds attract investors with high interest rates, but their sponsoring authority may be weak or unreliable and thus they are a riskier investment.
  • States, cities, and municipalities offer Municipal Bonds, which are exempt from federal taxes and sometimes state taxes.
  • Corporate Bonds can be safe or risky depending on the stability of the corporation.
Another bond investment option is to put your money into bond funds. When investing in stocks, you can choose an equities mutual fund, which contains a variety of stocks. While the individual stocks may perform differently, the fund is designed to show gains overall and is a safer investment option than putting all your money in one stock. The same principle applies for bond funds.

See also: Equity vs. Debt Financing: Which is Right for My Small Business?

What Experts Recommend Before Investing in Bonds

  • Analyze all the options. Bonds can be attractive, but you must look at the yield, the terms, and the source.
  • Create a bond ladder. Investors select bonds with varying maturity dates, which balances the risk and returns the capital gradually.
  • Are you in it for the long term? Investors do well if they stick to their investment strategy. Bonds that are not big on growth are more secure in the long run.
  • Examine the quality of each bond. Investors should research the history of the bond provider. Investing in A-rated bonds promises considerable security, but you should also consider those rated as BBB, BB, and B to balance the speculation.

So, is Investing in Bonds a Smart Decision?

At the end of the day, making a smart decision is really a personal call. As of this writing, bond yields have been low while stock values have been increasing. In addition, the Federal Reserve has only recently started to increase interest rates to forestall the inflation, which devalues bonds. But as always, the market is subject to change at any time. Most financial advisors and planners still suggest having enough quality bonds in your investment portfolio to balance the security of your other investment vehicles. Do your research, talk with a professional, and make the right decision for your unique needs and goals!

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This communication is provided for informational purposes only. It is not intended to be an advertisement, a solicitation, or constitute professional advice, including legal, financial, or tax advice, nor is StreetShares providing advice on any particular situation. This is not an offer of credit. All applications are subject to approval, no guarantee of funding. StreetShares is not a bank. Veteran Business Bonds are not FDIC insured, not bank guaranteed, and not a bank deposit product or account. May lose value. This communication is not an offer to sell nor a solicitation of an offer to buy securities. See Offering Statement and related SEC Filing Documents

 

Topics: Growing Your Savings

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