A Bond is a certificate of debt. In the event that you hold a relationship that which you hold is a certificate stating that whoever issued that bond owes you money. When most people think of Bonds the very first thing that comes to mind are probably the government bonds that their grandmothers bought for them and held to maturity and then gave for them as a present because of their 18th birthday. These bonds are issued by the U.S. government and are historically regarded as risk-free, which they are. The only path you could lose your cash is if the U.S. government were to go broke. We all know that'll never happen. These bonds are issued by the U.S. treasury. What goes on when you are buying bonds is that you loan the government your cash for a set amount of time. The Government then pays you interest on that loan every year. When the term of the loan has run out or as the saying goes in financial circles, when the bond has matured, the government then offers you back the money that you loaned them in the very first place. Sounds just like a sweet deal right? It could be. The upside to buying bonds with the United States Government is that there's almost no risk you will lose the money that you invested and you is going to be earning interest on that money before bond matures. The downside to buying bonds is that although you'll never lose the quantity of money that you invested you can find other factors in play that will cause the purchasing power of the money that you will be buying bonds to decrease. Translation: You it's still given back the quantity of money that you committed to the very first place but that money is going to be worth less than it was whenever you invested it. This is caused by inflation.In short when I say your purchasing power can decrease what I'm saying is your your $100 can purchase 30 gallons of gas today but it will simply have the ability to buy 20 gallons of gas a year from now. Same money, less gas. That is the number one problem with Government Bonds. Fortunately the Government also knows that this is a problem and since they have to keep consitently the bond money arriving to aid all the spending they do they created a solution for this issue called Treasury Inflation Protected Securities.
Treasury Inflation Protected Securities are essentially exactly like regular bonds. Why is Treasury Inflation Protected Securities different is that you do not get a typical rate of interest whenever you spend money on Treasury Inflation Protected Securities. What goes on is that the interest rate that you will be paid on your cash is equal to the rate of inflation. Like everything, buying bonds in this way is beneficial under certain conditions and harmful under others. If you had been to be committed to Treasury Inflation Protected Securities whilst the rate of inflation skyrocketed to double digits like what happened in the mid to late 1980's then your Treasury Inflation Protected Securities investment would make you very happy. However, if the rate of inflation is 2% whilst the rate of interest paid from the standard treasury bonds are 4% then you could be passing up on potential profits. I'm a lover of Treasury Inflation Protected Securities because when buying bonds in this way your cash won't lose its purchasing power and that alone may be worth the buying price of admission.
There are many strategies that can be used when buying bonds by the Government. These bonds are risk-free and are a great way of preserving your wealth. However,government issued bonds are not the only bonds on the market.
Municipal Bonds: The U.S. government is not the only governmental entity that depends on raising money to pay its bills. Municipal Bonds are bonds that are issued by a city and other local government or their agencies. Municipal Bonds are riskier than U.S. government Bonds and for that reason Municipal Bonds usually pay an increased rate of interest than U.S. government bonds. One of the reasons that the investor would prefer to invest money in Municipal Bonds is due to the fact that more frequently than not the interest paid to the bond holder is exempt from federal income tax and from the income tax of the state that issued the bond. This is a big deal because tax fee growth is the best kind of growth there is. premium bonds to invest
Corporate Bonds: Corporate bonds are one of many few things on the planet of finance that's just what it appears like: Bonds issued by a corporation. When corporations need to improve money they will usually issue stock. That is standard procedure. However, issuing stock means diluting the worthiness of the previously issued shares. This isn't always a viable option and so to have around doing that a company will issue corporate bonds. Corporate bonds can be hugely risky or they can be hugely profitable depending on the company whose debt you purchase. The upside to Corporate Bonds is that the interest paid from the debt is more frequently than no more than any U.S. or municipal bond. Another upside is when the business goes bankrupt the bondholders are paid before the shareholders. The downside to buying corporate bonds is when the business goes bankrupt and there's no money left after liquidation then it doesn't matter who gets paid first because nobody is going to be getting paid at all.
Investing in Bonds is important to almost every portfolio since they're a great hedge against the volatility of stock. Historically when stock prices drop, the interest rate on bonds increase and vice versa. I didn't get into all the different types of bonds you can find because my goal is to get you to aware of these existence. However, if you prefer greater detail then follow my blog as I is going to be blogging about all the different types of bonds in the near future.
