Know The Basics Of Bonds
A bond is a debt security, similar to an I.O.U. When you purchase a bond, you are lending money to a government, municipality, corporation, federal agency or other entity known as the issuer. In return for the loan, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the face value of the bond (the principal) when it “matures,” or comes due.
Among the types of bonds you can choose from are: U.S. government securities, municipal bonds, corporate bonds, mortgage and asset—backed securities, federal agency securities and foreign government bonds.
Why Invest in Bonds?
Many personal financial advisors recommend that investors maintain a diversified investment portfolio consisting of bonds, stocks and cash in varying percentages, depending upon individual circumstances and objectives. Because bonds typically have a predictable stream of payments and repayment of principal, many people invest in them to preserve and increase their capital or to receive dependable interest income. Whatever the purpose—saving for your children’s college education or a new home, increasing retirement income or any of a number of other financial goals—investing in bonds can help you achieve your objectives.
Strategies
How do you make bonds work for your investment goals? Strategies for bond investing range from a buy-and-hold approach to complex tactical trades involving views on inflation and interest rates. As with any kind of investment, the right strategy for you will depend on your goals, your time frame and your appetite for risk.
Bonds can help you meet a variety of financial goals such as: preserving principal, earning income, managing tax liabilities, balancing the risks of stock investments and growing your assets. Because most bonds have a specific maturity date, they can be a good way to make sure that the money will be there at a future date when you need it.
By having a basic understanding of bonds, you will have a better idea of to make use of bonds as part of your investment portfolio to achieve the investment objectives that you want.
By Sean Toh
