When one thinks of investing in bonds, some of the first thoughts to come to mind are “safe”, “reliable” and “stable”. However, the misconception among many investors that investing in bonds is only for the faint hearted, is not entirely true. If your investment portfolio is used inefficiently and carelessly, bond investments can utterly ruin your portfolio but on the other hand if managed properly bonds are one of the safest and most reliable investments offering long term capital growth and returns. In today’s ever changing and fast paced business environment, the bond investment market has seen a lot of evolution and this has set the foundation for the issue of various newly developed bond products with varying risk-return ration to suit different investors and risk profiles.

Bonds For Investment – What Ar They?

Bonds can be viewed in the same light as I.O.U’s. The only difference is, in this case, the creditor is you and the debtor is a major public sector body like the government, municipal corporation, federal agencies or other major public or private sector entities. These entities are also known as issuers as they issue the bonds. Investing in bonds is a promise from one of these agencies to repay the face value of the bond on maturity and to pay a fixed rate of interest all through the life of the bond.

At present in the U.S bond market, some of the common types of bond investments available are US government securities, municipal bonds, corporate bonds, mortgage and asset backed bonds, federal agency securities and foreign government bonds. Bonds can also be issued in the forms of bills, notes, debt securities or debt obligations.

Long Term Investment Bonds – How Do They Work

Bonds are issued by many companies and government agencies to fund their day to day activities or to fund a specific project or investment. Some terms that you might want to get familiar with while investing in bonds are terms like “par value”, this is also known as the bonds face value. The interest payments which a bond makes are known as coupon payments. When a company or a government agency wants to fund a particular task or venture it issues bonds on the primary bond market where everyday investors can purchase these bond investments. The bonds make coupon payments through the life of the bond and repay the principal or the face value upon maturity.

Let us assume that you purchase a bond investment for the face value of $2,000 and it is paying a coupon of 8%. This would mean that the bond would will be paying you an annual interest payment of $160 which usually arrives in 2 6-montly installments. However, if you were to buy the same bond on the secondary market for $2,200, the coupon payments would not change however, the yield would be lower and at 7.3% instead of 8 considering the fact that you bought the bond at a premium. The same would also be true for the reverese, where if you bought the bond investment for a discount at $1(,800, while the coupon payment would not change the yield would be higher and the figure would be 8.9% instead of 8%.

In the event that you decided to sell your bond investments at the price of $2500 with the coupon of $160, where the face value of the bond was still $2,000, your total return would be 33%. This is owing to the fact that bonds not only take into consideration not only the coupon payments but also any capital gains / appreciation that may have risen from the transactions.

These are some of the basic insights into investing in bonds.

Reference:

1. How bonds work – CNN Money