Investing in Bonds

Bonds may prove to be low in performance in terms of earnings when compared to stocks, but it might prove to be an interesting investment option in case you want to have a part of your investment money in a more secure placement. Both stocks and bonds are considered securities but they also differ in some ways.

Bonds are known as fixed income securities in that the amount of income that bonds generate are already set or fixed for each year. No matter what happens to the bond or the market, it will make the exact same amount of money. It is because of this that bonds become attractive since they are not affected by outside influences when it comes to earnings and therefore may be considered as a safer and secure form of investment option. Holders of bonds are in essence lending money to the issuer whereas stock holders own a part of the issuing company, also known as an equity stake.

In the US, there are four basic kinds of bonds available, which depend on the issuer of the bond. The first ones are those being issued by the US Government and the other government agencies. The second are those bonds that are issued by private corporations. There are also bonds that are issued by state and local governments while the last types are those sold by foreign governments. The latter are considered as difficult bonds for private individual investors to obtain.

US government bonds are more commonly called as “Treasuries” since they are mainly being offered by the Treasury Department. These bonds may come in a number of maturity periods ranging from three months to 30 years. The various types of Treasuries also vary in terms of interest paid as well as maturity periods. These bonds are guaranteed by the US government and are free from state and local taxes on their interest payments.

Bonds issued by other government agencies include those offered by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corp. and the Government National Mortgage Association. These bonds are issued with the full backing of the government for special purposes such as use for funding home ownership.

Corporate bonds are issued by private companies. These companies can also sell debt the same way they sell stock at the securities market. These bonds usually provide more flexibility for the company in terms of how much debt it can issue and at what interest it can pay. But companies still have to consider making their bonds attractive enough so that investors may be interested in buying them. In essence, corporate bonds carry a higher interest rate than government bonds but also run a higher risk of the company going bankrupt and defaulting on paying for the bond issued.

 

Posted by Ardent Editor on Nov 7 2007 in Retirement 101

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