- Posted June 17, 2014 by
Bond Market: Why to invest in bonds?!
A bond's face value, or the price at issue, is known as its "par value," and the interest payment is known as its "coupon." The price of bonds will fluctuate, similar to stocks, throughout the trading day. However, with most bonds, the coupon payment will stay the same (some floating-rate securities do exist). If an investor purchases a bond in the secondary market at the face value, the bond is considered to be sold at "par." If a bond's price is above its face value, it is sold at a premium. If a bond's price is below face value, it is sold at a discount.
In general, there are three main categories that bonds will fall under: Government, Municipal, and Corporate.
Government Bonds: For bond investors looking for low risk investments, U.S. Treasuries are typically the best bet, as they are backed by the full faith and credit of the U.S. government. The U.S. Treasury regularly offers three types of securities: Treasury bills, notes, and bonds.
Municipal Bonds: Just as the federal government needs funds to operate, local governments and public entities, such as school districts, often issue municipal bonds to meet their financial needs. Municipal bonds can be issued by states, cities, towns, or public commissions to provide money for schools, hospitals, and other public works. These securities provide income that is free of federal and, in some cases, state and local taxes. (Although income generated by most municipal bonds is exempt from taxes, any capital gains earned from the sale of bonds are subject to all federal and most state tax laws and certain bonds may be subject to the alternative minimum tax.)
Corporate Bonds: Corporate bonds, unlike U.S. Treasuries and municipal bonds, are fully taxable and may carry greater risk. At the same time, they may offer higher returns than tax-advantaged bonds. Corporate bonds are issued by corporations in the need of capital and are typically issued in denominations of $1,000 with terms of 1 to 30 years. Unlike stocks, bonds do not give the holder ownership interest in the corporation, as they are simply a tool used to lend the corporation funds they need to meet their goals.
As all investment, bond investment has it's negative and risk factors. Here is a list of several general risk factors that has it's big influence on bonds:
1) Inflation Risk
2) Interest Rate Risk
3) Call Risk
4) Credit Risk
5) Liquidity Risk
6) Market Risk
In fact, bonds are as important today as ever. Here is a brief overview of four important reasons to consider an allocation to bonds:
3) Protection of principal
4) Potential Tax advantages
5) The bottom line
Here i tried to introduce facts and reasons why it's better to invest in Bonds and how this investment is more safe than other's. Totally i have over 5 year investment experience in Stocks, Bonds and Structured investment products in NYSE, Nasdaq, HSE. Totally my investment strategy is designed to Equity investment, but Bond investment has it's stable positions in my portfolio. Unfortunately many people who has financial recourses don't recognize investment in stock and bond market. For most of them it's better to invest in some very high-risk business companies than to buy bonds or stocks in stock market.
CEO at I.B. Capital Management