What are Bonds?
Bonds are debt instruments that a government or a company issues in order to raise money.
Bonds are issued for a specific period of time. The lender gets rewarded in the form of interest. Plus, the borrower also has to return the principal amount after the expiry of the period.
Most companies offer long-term bonds including five and ten years. Cashing your bond before the expiry of the term can turn out to be costly.
Buying and Selling bonds:
Most people think that once you have bought a bond you need to hold it till it matures. That is simply not the case.
Bonds can be traded just like stocks. In fact, some bond markets are bigger than stock markets.
Advantages:
- You will receive a fixed income on your bonds over a period of time in the form of interest payments.
- If you hold the bond to maturity you will get the principal amount back.
- Bonds are considered safe because you cannot lose your investment unless the issuing entity defaults.
- You can also profit on the resale of your bond if there is an increase in its market value.
Disadvantages:
- Investing only in bonds might not enable you to save enough for your retirement.
- Companies can default, which is why you need to check S&P ratings before you invest.
- Measuring the true value of a bond can be quite confusing.
Conclusion:
Financial advisors love bonds because they are a conservative and secure way of earning money on your investment. Government bonds are the most secure but you can also opt for company bonds if you have trust in the company.