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Understanding The Types of Investment Bonds Available

Investment Bonds

What Are Investment Bonds?

Investment Bonds are debt securities issued by an entity that needs to raise money for their company, city or country. They are an important part of a well-balanced portfolio and offer more stability than the stock market.

The investor purchases a bond and is paid a fluctuating interest rate on their investment for loaning the issuer their money. Bonds are issued by many entities, including municipalities (municipal bonds,) corporations (corporate bonds,) and federal agencies, to name a few.

They are generally a low yield, low risk portfolio asset, and should make up a larger portion of an older adult’s retirement portfolio. As with any investment, the return on the invested capital is not guaranteed, and due diligence should be carried out before committing any money.

Types of Investment Bonds

There are many choices when it comes to buying bonds. Here are a noteworthy few:

Municipal Bonds: These bonds are issued by municipalities, who in turn use the money for city projects, infrastructure improvement and projects for improving the community in general. Some, but not all of these bonds are not taxable.

U.S. Treasury Securities

One of the most common and historically safe investments is bonds. These include treasury bonds, T-bills and other U.S. government-backed securities. There is a huge market for trading these bonds.

Corporate Bonds

As the name suggests, these investment bonds are issued by public and private corporations. This is an excellent way for reputable companies to raise funds for various business-related projects. Corporate bonds are essentially IOUs and do not give the investor ownership in the corporation. Any interest earned from these bonds is taxable.

High Yield Bonds

Issued by those entities that are considered “high-risk” by credit rating agencies, high yield bonds offer higher interest rates to attract investors. Of course, with those higher returns comes a higher risk of losing money. Research these organizations well before purchasing their bonds.

Earned interest on bonds is paid out on a regular schedule, depending on the type of bond issued. All bonds are issued a maturity date upon purchase. This date determines how long the buyer will receive interest payments and when the principal will be repaid. Buying and selling investment bonds can be lucrative, but requires extensive knowledge to do so on a regular basis.

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The Good and Bad of Bond Funds

Bond Funds

What Are Bond Funds?

Bond funds are types of mutual funds. These collective investments differ from other funds because they primarily concentrate their investments on bonds. In some cases, a bond fund is composed exclusively of bond investments. There are four main types of these funds.

• Government bonds — These funds mostly buy U.S. Treasury bonds. While they are popular for their safety, they are not very profitable because the yields are low. The low yields are caused by the safety of these investments.

• Municipal bonds — Funds that focus their investments in these bonds are often exempt from federal taxes.

• Corporate bonds — These funds carry a higher risk because their funds are insured by companies rather than governments.

• Mortgage bonds — Government loan agencies, such as Fannie Mae and Freddie Mac, issue such bonds.

Advantages and Disadvantages of Bond Funds

It may not seem apparent why a bond fund might seem superior to investing directly in bonds themselves. Some investors prefer these investment schemes for the management provided. This facet of a bond fund saves investors from having to do their own research.

Other investors appreciate the diversification, even though the differences between the yields of distinct bonds are much less than those found between stocks. The liquidity of these investments is what draws many investors back during troubled times in the market. They know that they can buy a bond fund and wait until trouble passes. Then it is easy to sell it and reinvest in stocks that are more active.

There are drawbacks to bond funds, especially when compared to individual bonds. Funds usually charge fees for purchases that are calculated using the total investment amounts. The yields with bond funds vary because they are spread across several different bonds rather than keyed in to one. Since fund managers change the nature of the investment over time, the net asset value of bond funds will change rather than remain at a guaranteed rate.

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Why Buying Bonds Is Risky Now

The Reason Why Buying Bonds Is Risky In The Current Economy

buying bonds is riskyBuying bonds is risky in the current economic climate.  Bonds are usually considered one of the safer investments, especially by long term investors that are looking to safely invest their money and earn a consistent rate of return.  However, after years of sluggish economic growth and “loose-money” policies by the United States Federal Reserve, bonds are at historically high prices and are paying out historically low yields, which makes them not only unattractive investments based upon their yields when compared to other investments, but downright risky to hold.

The reason why buying bonds is risky at the moment is because financial products have a tendency over time to revert to the mean price levels at which they traditionally trade.  If the United States economy begins to grow more rapidly and the United States Federal Reserve starts to raise interest rates, bonds will likely revert to their mean trading levels that they have historically traded at. This would cause the price of bonds to drop significantly, which will cause those investing in bonds at currently elevated prices to lose a significant amount of their principal investment.

Buying Bonds Is Risky Now | Perception Is Not Reality

Despite the perception that buying bonds is a safe investment, the reality is that buying bonds is risky at current levels.  The perception that bonds is a safe investment is true during normal economic times, but needs to altered during the current economic backdrop that is skewed by government interest rate policies that are still in place to deal with the fallout from the 2008/2009 financial crisis and resulting banking sector problems and economic slowdown.

Based on valuations and the potential for bonds to decrease in price as the economy strengthens, buying bonds is risky.  Essentially, bonds are in a bubble and overbought due to overwhelming demand from investors looking for the safety that bonds are perceived to provide.  Bubbles tend to end with a drop in the price of assets that are traading at bubble levels because so many people own the same assets and try to get out of them at the same time.  This is why buying bonds is risky in the current environment.  Once the tide turns against investing in bonds, the money invested in bonds will rush out of bonds and cause them to fall rapidly in value.  The losses in some bonds, particularly United States Treasury bonds, could be significant once investors shift a portion of their investment portfolio out of bonds.  While buying bonds is risky, investors looking for safe interest paying investments may want to consider alternative investments, such as annuities or Real Estate Investment Trusts (REITs).

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Which Types of Bonds Should You Choose Now?

Types of Bonds for Investors

Types Of Bonds

If you have decided to put aside some money in bonds, then you will first need to determine which types of bonds you are most comfortable with purchasing.  There are a number of different types of bonds to choose from on the bond market, and which is the best bond for you should be based largely on your tolerance of risk and your investment goals.

The most popular bonds are municipal bonds or government bonds, corporate bonds, asset-backed securities and mortgage-backed securities, as well as international bonds.  Bonds can further be broken down by the sector of the market that you wish to invest in, and by issuer, coupon rate, credit rating, yields and more.  Each bond offers a unique balance of reward and risk.

The Easiest Way To Determine Types Of Bonds

The easiest way to determine the type of bonds that you should be investing in may be to look at the stage of life that you are currently living in, since different life stages usually translates to different investment objectives.  For example, if you are in your twenties and thirties, then your tolerance of risk is higher in most instances, because you are not looking retirement down the nose.  You are at a better position during this life stage to go for bonds that offer high-yield returns.  High risk bonds with high coupons can be the right choice, even though there is a chance that your investment will turn sour.  The thinking is that even if you lose on an investment while young, you still have many years to grow your retirement fund and meet other financial goals. These are risks that you might not make when reviewing different types of bonds in your forties or fifties, when you can see the light at the end of the tunnel and your retirement is looming just a few years into the future.

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Carry the World on Your Shoulders with Greek Bonds

Greek Bonds: Why You Should Go Greek

Greek Bonds

In spite of the fact that Europe is still in the midst of economic crisis, Greek bonds continue to grow in popularity. This may seem strange to investors who are used to trading stocks rather than bonds. When trading stocks, the economic stability of a company is imperative to making returns on an investment. If a company is doing well, its stock rises. If a company is doing poorly, its stock falls. When it comes to bonds, however, it works a bit differently. Essentially, a bond is like a loan. When you buy a Greek bond, you are loaning money to Greek companies or governmental bodies. The interest rate, or coupon, is set when you first negotiate the investment, as is the date when the bond will reach maturity and the principle will be repaid. During the period that you hold the bond, you receive interest in the form of monthly, semi-annual or annual payments. It is the fixed loan term that makes bond truly different from stocks. While both investments are types of securities, many stocks can be held indefinitely.

Investing in Greek Bonds

There are a number of reasons why investors choose Greek bonds. Because of their fixed terms and fixed interest rates, bonds are considered to be much more secure than stocks. As Greece’s economy continues to teeter on the edge of destruction, bonds allow investors to get involved without risking everything. Additionally, bonds can prove to be greatly beneficial to those who sell them. Money loaned through a bond to a Greek company can be used to keep the company on its feet in trying times. Bonds also offer a secure way to loan money to the Greek government to help keep up with expenditure. Whether you are after the investment returns, you have family in Greece or you simply want to help out, there is no doubt that investing in Greek bonds can help keep the European economy afloat.

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Series I Bonds: Three Ways to Cash In

Series I Bonds: From War Bonds to Savings Bonds

Series I Bonds

Series I bonds have a long history that started amidst the conflicts of World War II. The United States government needed more money to fund the war effort and they turned to the American people for help. By buying war bonds, an investor was lending the government a sum of money. In exchange, they would earn interest on the loan, which would be paid back in a series of regular payments. At the end of the bond term, the entire premium would be repaid. War bonds, or liberty bonds, as they were sometimes called, did not outlast the war. Instead, they were converted into savings bonds, which are still available today. Modern savings bonds come in two types: series EE and series I. Series EE bonds reach maturity in exactly 20 years and double in value during that time. After maturity, they continue to earn interest, giving investors an additional decade of payments. Series I bonds, on the other hand, pay two different types of interest, as well as the initial premium, giving investors three ways to cash in on their investment.

Why Choose Series I Bonds?

I bonds, like all savings bonds, are some of the most secure investments available. While bonds are often considered to be low risk, government-issued bonds carry even less risk than their corporate counterparts. Because most of the terms are fixed when the bond is issued, there are few things that can go wrong. While a company can become insolvent and find itself unable to repay investors, governments rarely declare insolvency. A series I bond pays two types of interest. The first type is a fixed rate interest that is decided by the treasury at the time of issue. The second type is a variable rate interest that is adjusted for inflation every six months. This means that I bond holders have the best of both worlds. With series I bonds, you get the security of the fixed rate interest payments as well as the growth potential of the variable rate payments.

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