Long Term Investment Bonds – Risks

Mentioned below are some of the risks associated with investing in bonds:

• Interest Rate Risk: One of the major risks associated with investing in bonds is the interest rate risk. Simply put, this denotes that short term bonds are the safest as there is usually minimal interest rate fluctuation over the short term, in comparison to long term, high-yield or junk bonds which are subject to higher interest rate fluctuations. One fact that needs to be taken into consideration is that the longer the term of the bond the higher the return while the greater the interest rate risk and vice versa. Investors should consider the time frame of the bond while investing because at times it may be more prudent to invest your money elsewhere and hedge your returns against inflation.
• Assumed Risk: This risk refers to credit rating risk. Credit ratings allows investors to make more informed decisions while investing in bonds. The major bond ratings agencies are S&P and Moody’s. Bonds with higher ratings carry lower risk and bonds with lower ratings carry higher risk. Bonds which have a rating of triple-B and above are considered investment grade. It is safe to assume that in a bull market junk bonds may be a safe option but in a bear market investment grade and higher bonds are the usual bond investment choice.
• Bonds May Be Called: Certain bond investments may have the option of being called back by the issuer. This is done in order to protect the bond issuer from paying higher interest rates. The bond investments which have call back options entitle the bond holder to receive a predetermined amount on the call date prior to the maturity of the bond. This however constitutes the risk that you may have to reinvest your money at a lower interest rate.

Advantages Of Bond Investing

Listed below are some of the advantages of investing in bonds:

1. Bond investments are considered predictable investments. This is because you know how much of interest you will receive, when you will receive it and how much money you will receive upon the maturity of the bond.
   
   
2. Investing in bonds is considered to be more stable than stocks. This is true more in bear market owing to the stable nature of bonds.
3. Retirees and long-term investors consider bond investment the safer option as it assures them of a fixed income stream should they decide to buy and hold the bond.
4. The interest rate paid by a short term bond usually exceeds that offered by a bank’s savings account.
5. Certain bond investments, e.g. municipal bonds offer tax exempt income.
6. In comparison to other forms of investments, a bond investment require less management.

Disadvantages Of  Bond Investing

Some of the disadvantages of investing in bonds are:

1. Bonds offer no hedge against inflation rates as inflation is one of the main reasons why bond prices fall.
2. Bonds offer lower interest rates in comparison to stocks over the long term.
3. Bond investment prices may vary depending on market interest rates.
4. There is chance that certain corporations or government subsidiaries may go bankrupt thereby leaving your bond investments worthless.
5. Long term bond investments usually tie up funds for a long time which can be invested elsewhere for better returns.

These are some of the advantages and disadvantages of investing in bonds and once you have read everything about investing in bonds and learned all the facts, you are likely to be more aware of what it takes before investing in bonds.

References:

1. Investing in Bonds Factsheet – Ohio State University
2. Buying Bonds: Advantages and Disadvantages – RL Rouse

The US bond market has various forms of bonds available for investment. Some of the most common variety of bonds issued in the market are US government securities, municipal bonds, corporate bonds, mortgage and asset backed bonds, federal agency securities and foreign government bonds. Bond investments can also be issued in the forms of bills, notes, debt obligations and debt securities. Listed below are some of the important facts about investing in bonds which investors need to know prior to considering investing in them.

Long Term Bond Investment Tips

• Bonds Can Be Considered I.O.Us: Bonds are a way to fund specific operations or projects be it in the public or the private sector. When government agencies or large corporations want to raise secured finance, they do so by issuing bonds in the primary market and as a result are known as issuers. When individuals purchase these bonds, they become bond holders and as a result of which own secured credit.
• Stocks Vs Bonds: For long it has been a misconception that stocks outperform bond investments owing to the fact that stocks are seen as more volatile and hence are considered to return greater value to their investors. However long term moving averages when compared would disagree. It is only in the post World War II era that stocks have outperformed bonds. Between the years 1870 to 1940 both stocks and bonds had early the same returns. However in the bond market of 2001-2003 bonds once again over took stocks. Although stocks did better in between 2004 and 2007 by the year 2008 bonds once again had taken over.
• Investing In Bonds Can Cause You To Lose Money: The age old saying that bonds are the safest investments on the market may not hold as much water as it once did. As seasoned institutional investors will testify, bond investments can cause you to lose money if not managed efficiently. While investing in bonds represent fixed interest investments, because of their fixed life span and fixed interest payments, the returns a bond may generate may vary and may also sometimes be negative causing you to lose money.
• Bond Prices Are Negatively Related To Interest Rates: With the rise in interest rates in the market bond prices will fall and vice versa. However for an investor who is going to hold his or her bond investment to maturity, interest rate fluctuations do not matter as the investor will get back the face value of the bond upon maturity plus all the interest payments over the life of the bond.
  
  
• Bonds and Mutual Funds Are Mutually Exclusive: Investors often confuse bonds and mutual funds. With a bond investment, investors have the guarantee that they will receive the face value of the bond upon maturity plus all the interest payments over the life of the bond, unless the issuer goes bankrupt. However in the case of a mutual fund the return an individual investor can expect is uncertain owing to the fact that the actual value of the mutual fund fluctuates.
• Tax-Free Bonds: While tax free bonds might yield less that taxed bonds, it might be prudent to hold certain tax-free municipal bonds depending upon the tax bracket you fall under. For example if you are in the 28% federal tax bracket it would be better to hold tax-free bonds owing to the fact that they will net you more in comparison to taxed bonds after tax.
• Invest Long Term In Bonds: A very common issue with investing in bonds is the time factor. A lot of investors sell their bond investments prior to maturity and as a result of which may sometimes experience very little capital gains or in certain cases capital losses. However investors who can hold their bond investment till maturity need not worry about interest rate fluctuations or varying yield.

While investing in bonds is a safer option by comparison, it is always advisable as with any investment, that consumers should carry out sufficient research and seek the advice of a professional prior to investing in bonds.

References:

1. Investing in Bonds, Top Things to Know – CNN Money
2. Bond Basics – Securities Industry and Financial Markets Association

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