What You Need to Know About Bonds
Typically a bond is some kind of loan extended by the bondholder to the issue in exchange for the bonds. The money is repaid together with interest after the maturity period agreed upon before signing the bond. Investors and people who love venturing in finance love bonds because of their relatively high interest and low risk. But before you wade into the ocean, there some several things you need to know about bonds. They can be complex with confusing clauses, terms, and statements, and if you make a mistake, you can invest your money in unreasonably expensive bonds with low returns. Therefore, having a basic understanding of bonds can save you money, time, and frustrations some novice and even experienced investors have encountered. This article, thus, brings you some of the basic things you need to know about bonds to get you started.
The reality is bonds give high interest more than what you can get from stock markets. Bonds offer annual interest rates on returns that range between 8-15 percent and the total returns on interest if the individual holds them up to maturity period is normally between 6-10 percent. When you consider the interests on bonds, they are higher than what most commercial banks give on deposit or savings, therefore, buying bonds from recognized issuers can be better than keeping your money in banks, but you need to discreet about it. This is because the higher the interest, the more the risks because bonds are not insured, unlike commercial bank savings. Once you buy bonds, the only assurance you have to get your principal and interest is the guarantee of the bond issuer. Therefore, before committing your life-saving in bonds, make sure you do a background check of prospective issuers. Examine and assess the bond issuer’s financial strength, reliability, and reputation before you make your final decision. One way to do this is by checking their annual audited financial statements for the past couple of years to establish their past financial history.
The other vital thing you need to pay attention to is the bond maturity period. The maturity period in bonds implies the time the bond issuer pays back the money you lend them when you signed for the bond. If you keep your bonds until the end of the maturity period, you are supposed to receive the principal amount and accrued interest during that period unless the bond issuer defaults. There are two main types of bonds, short-term bonds, which last between 2-3 years, and long-term bonds, whose maturity period is between 10-30 years. You need to note that the longer the maturity period, the higher the interests in bonds. That is why in case you invest in bonds with the hope of using that capital in few years, then short-term bonds are what you need. However, if you have a long investment timeline, then go for the long-term bonds. The principal thing you need is to assess the financial stability and reliability of the bond issuer before investing your money. Those are few main things you need to have in mind before venturing into bonds.