What do you know about bonds? Not James Bond, investment grade bonds. If you guessed "something having to do with the stock market," you're on the right track but not completely there! The question you should be asking is “are bonds a good investment?”
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 from a bond market, 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. Some coupon bonds pay off steadily throughout the maturation of a bond (payout times depend on terms) in the form of coupons and the remainder is paid off when the bond reaches maturity.
So what does that mean for you? Are bonds a good investment option for your portfolio? Keep reading to find out!
When you invest in a individual bond, you agree to hold the bond for a set period of time, typically five, ten, or thirty 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, which is the bond price, and cash it in for $5,000 when it matures in 10 years.
As stock markets become volatile, bonds can offer a steady income. Here are a few other important notes to consider when looking at different types of bonds:
- 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 payment rates, but their sponsoring authority may be weak or unreliable and thus they come with risk on the interest rate.
- 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.
What Experts Recommend Before Investing in the Bond Market
- 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 Bto balance the speculation.
So, is Investing in Bonds a Smart Decision?
At the end of the day are bonds a good investment? It depends on your investment goals, 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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