Most of us are familiar with stocks/ETS, mutual funds. Advanced folks may even be familiar with options - calls & puts, etc. A small few are familiar with bonds - so I thought I would provide a quick primer on them.
Bonds are another vehicle for organizations (governments, companies) to raise money. Treasuries (or, T-bills) are bonds that the US government issues (considered safest of all bonds). States and municipalities issue bonds as well periodic to fund various activities. And, lastly companies issue bonds to fund their expansion/growth, etc.
Bonds work thusly: The company C issues a bond offering 5% interest paid semi-annually maturing on 9/30/2022 (say). You invest (say) $100. This means that you will get $5 each year (paid twice a year at $2.50 each). Then, on Oct 1 2022, you will also get your principal $100 back.
(There are numerous other technical terms - call protection, make whole, etc. etc. but that's for another post or for advanced folks to read up on their own.)
A few key points:
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The riskier the company or organization, the higher the interest rate offered. Thus bonds from the US government are lowest in interest, so also those of Apple Inc. (with more than $200 billion in cash) while bonds from the Government of Venezuela command very high interest rates - as the danger of them not being able to pay their principal on maturity is higher. So interest rate rises in proportion to the risk of default
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Bonds tend to be lower risk than buying the stock because bonds are "senior" debt. This means that when a company files for bankruptcy, the common stock holders are wiped out first. Then, when company assets are sold off to the highest bidder, the monies that are raised are distributed first for wages/court-authorized fees. Then, comes bond holders, and then other creditors such as suppliers, etc. So bonds afford a measure of protection to investors even in default.
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Bonds typically have a par value of $100. Invest $100 and get back $100. But because risks associated with the bond may rise/fall over time, at a given point the bond price may be more or less than $100.
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Instead of buying individual bonds and doing all the research yourself, you can buy bond funds which are simply a collection of bonds that the fund manager has decided to buy (based on the fund profile).
Personal story: Our own risk-averse strategy is to wait for bad news for individual companies and then look for their bonds to see if we can purchase any of them at a discount. This happened a few years ago in 2010 when the bonds of BP dipped well below $100 because of their Gulf of Mexico oil spill. With the US government threatening legal action against BP, bonds fell dramatically. Quick research suggested that BP had real tangible assets - that it was not gonna go bankrupt (according to us). So we invested in BP - generated a decent rate of return.
Do your research and, if appropriate, add this to your quiver as one among many arrows in your financial planning toolkit.
Good luck.
Submitted November 24, 2017 at 12:18PM by arnexa http://ift.tt/2hOYpwk
