Bonds Investing 101

Bond investment is simply investing money in buying bonds which is an IOU (short for I owe you), where the investor is ready to provide money to government or company in exchange of flat interest rate. It is most common type of fixed income investment. The bondholder becomes the creditor for the company to which he has invested the money.

As business grows, it does not have enough amount of money to pay for its various needs which is necessary to keep it growing. Due to this, companies sell a portion of company to general public in the form of stocks and by issuing bonds. The second idea of issuing bonds is simply borrowing money from investors in exchange of set interest. The companies issue bonds instead of borrowing from banks since cost involved is high and there are restrictive debt agreements. Bonds are issued by various government organizations, municipalities, and corporations. There are many factors which affect the performance of bonds but rate of interest and quality of credit are most important reasons which affect a bond’s behavior more than any other factors. Now, we’ll discuss about types of bonds which are:

High yield bonds

Companies that have below investment grade ratings issue high yield bonds. Since they own higher credit risk, Investors receive higher yields in return. Due to this they are also known as ‘junk’ bonds as they are subject to greater amount of risk.

Emerging market government bonds

These are issued by governments of developing markets such as Mexico, Brazil, or Russia. They have a bigger risk from initial stage itself and their value keeps on changing depending on political scenario of emerging countries. The investors in reward are given higher yields for bigger risks taken during such situations.

Bank loans

These are loans issued to non-investment-grade companies which are focused on funding the various operations. They also proved to be beneficial as the loans’ rates reset from time to time based on changes in market rates.

High grade corporate bonds

These are debts issued by large corporations that have less risk on interest payments.

Mortgage-backed securities

These are issued mainly by banks and other financial institutions which are provided as a form of securities to investors.

Agency bonds

These are issued by the agencies of the United States Government which are generally considered to be a place for safe investments and lesser chances of risks.

U.S. Government bonds

They are also known as U.S. Treasuries and are supported by the U.S. Government and are considered to almost have no risk but they are frowned upon as they have way too low interest rates. Non-U.S. developed market government bonds or private equity bonds- These Bonds are issued by governments of countries which are economically advanced such as France, Great Britain, or Japan. These bonds can sometimes include currency risk.

Over a long period time, the stock market tends to be more profitable compared to investment in bonds. In spite of this, the bond investment seem to have more interest mainly because in case a company goes bankrupt due to various market factors, the investor can be certain that he would receive the original money he invested. On the other hand, the value of stocks is almost impossible to predict and appears to be scowled upon by the investors. Secondly the bonds pay interest at regular intervals of time to the investor which is quite helpful over the long run. Lastly, there is also chance of tax exemption for the interest earned over the bond investment.

In comparison to stocks which behave as a means of security to equity, bonds similarly behave as security for debts made by the company. Buying stocks makes the investor a partial owner whereas buying a bond there is no ownership but only a part of company or government’s debt. The bondholders share no profits when a company is performing well like stockholders but bondholders are given first preference over share holders if company were in bankruptcy. Therefore, we can say that Bond investing is valuable which has its own positives and negatives in the investment market.

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