Investing in Bonds What are bonds? We begin with the meaning of the term ‘bonds’ and how they work. A bond is a form of debt investment. You are giving your money to the bond issuer when you purchase a bond. You receive your money back with an interest on loan on either a determined date (the maturity date) or on a date of the issuer’s choice. The interest on loan can be fixed or variable. Companies, firms and governments use bonds as a method of raising money for their active projects. Bonds are fixed-income securities and are traded mainly on exchanges with others being traded over-the-counter. Par value is the value of the bond when it is issued. How do bonds work? If a company needs funding for any of it’s upcoming or ongoing projects, events, etc. they may decide to issue bonds instead of asking banks for loans. The company or any other entity issuing the bonds becomes the issuer who has to return the loaned funds back to the investors at a fixed time (maturity rate) along with the interest rate (coupon). The major factors that define the coupon or interest rate of a bond are it’s duration and the issuer’s credibility. Credit rating agencies decide the credibility of the firm/issuer. If the issuer has poor ratings then the risk of default is higher. The maturity date of bonds can range from a day to thirty years. Duration affects bond’s coupon as the longer the maturity date, the higher the interest. This is due to the fact that the risk of default also increases considerably when the time of the maturity date increases. The less the credibility of the issuer, the more coupon it will pay it return as it wants to assure the investor as the risk of investing becomes higher with investing in their firm. Advantages of bonds Bonds should definitely be a part of everyone’s retirement portfolio. Their advantages are- 1. Short and medium-term bonds are safer than stocks as they have lower volatility. 2. Many times, the interest payment of bonds is quite higher than those of dividends. 3. The majority of bonds are liquid, making them easier to sell when compared to other forms of investments. This also makes it easier to sell larger amounts of bonds without a dip in their prices. 4. Bonds are also preferred due to their assured lump sum payment at the maturity date plus the added benefit of a fixed payment twice a year. 5. Bonds are also considered safe due to the fact that if a company goes bankrupt those who have invested in bonds will still receive a share of their money while those investing in stocks or some forms often end up without any compensation. 6. Some bonds even provide tax-free income. These pay lower yields when compared to taxable bonds but can provide higher after-tax income. Conclusion Bonds are a great way to invest in the market but only if you want to invest for short or mid-terms as long term bonds can be quite risky. GCL India is a great platform for investing online and we will offer you our full assistance in making the right choices.
Submitted May 05, 2017 at 05:04AM by GCLIndia http://ift.tt/2qLq83m
