You may have heard a lot of people talking about bonds and calling them a great investment opportunity. It is not a new concept, but many people have a hard time understanding how bonds work and what benefits they can provide their holders.
Bonds are a loan taken by a company, but the terms and conditions of this loan are very different. Instead of asking the bank for a loan, companies sell these bonds to investors in exchange for their capital investments. The investors then receive an annual interest rate based on the bond’s face value.
It is important not to confuse bonds with stocks. A legal document outlines the characteristics of a bond. One needs to understand these terms and characteristics before stepping into the complex yet fruitful world of investing in bonds.
Here are a few things you must know about bonds before investing in them.
1. Learn About Bond Maturity
Every bond comes with a maturation date. This maturation date can vary according to the term decided with the beholder at the time of issuing. It happens when the bond issuer agrees to pay the capital beholder the face value of a bond.
The maturation period of your bond can determine many important factors for your financial investment. There are three different bond maturation periods you must know about.
- Long-term bonds: These bonds may take ten or more years to mature
- Medium-term bonds: These bonds take more than four years and lesser than ten years to mature
- Short-term bonds: These bonds mature under a four-year period
2. Consider Bonds a Safe Option
No investment opportunity comes without a risk. That is one of many reasons why bond owners always get bond insurance. However, when seen in comparison to stocks, bonds are believed to be a safe investment opportunity by millions of smart investors.
Since the federal government can be believed to be trustworthy, the returns on bonds are predictable. Many bondholders can also calculate their yield with the help of the issue date and a bond’s maturation period. Therefore, the risk is quite insignificant as compared to many other options.
There are many qualities of bonds, such as fixed interest rates, which make them predictable. However, it also means that their growth potential is also lower than stocks. Therefore, it is always a better idea to invest smartly in savings and bonds side by side.
3. Consider the Risks
As mentioned earlier, you may never come across an investment opportunity without risk being involved. Even if you lend money to someone for interest, there is always a chance of it never being paid back in time. That is why investments only work out for people with foolproof financial plans.
Some bonds, such as junk bonds, are often used in corporations. These bonds can be difficult to trade on public exchanges. Different bonds being presented by the same issuer can vary in their risks as well. Hence, there is always a risk of things going sideways.
