Top Nav

Investing in Bonds

investing-in-bondsBonds are most often used by people looking for a fixed rate of return and an element of safety. That’s not to say that bonds don’t have risk, they do. However, those tied to governmental instruments (U.S. Treasury issued) lend a bit more stability than investing in bonds from private companies.

When you hear the word bond, it might remind you of a gift given to you by a family member, as in a U.S. Savings Bond. In this case, you would hold it for a certain maturity period at which time you are paid the value it was upon purchase plus any earned interest. Think of it as the issuer borrowing money from the buyer and giving back an IOU in return. Interest earned is also free from state and local taxes.

The Benefits of Investing in Bonds

#1: As interest rates rise, bond values decline.

#2: Offer fixed rates of return.

#3: Provide safety in volatile stock market.

Unlike government-issued bonds, corporate and municipal bonds are highly influenced and affected by the financial health of the issuer. Corporations go bankrupt. Cities and states default on muni bonds. That’s the worst that can happen for holders of these bonds.

Municipal bonds are used to fund public projects, such as the construction of schools, hospitals, highways, sewers, and universities. While debt backed by a city obligation pledge rarely defaults, those generated by individual projects such as housing or health care facilities carry more uncertainty.  Of course, should a city go bankrupt, such as Detroit recently did, bonds become worthless.

Corporate bonds are fully taxable and issued by corporations that fund capital improvements, expansions, debt refinancing or acquisitions that require more capital than would ordinarily be available from a single lender. Risk here involves a corporate transaction that increases debt burden, natural disaster or regulatory change that can trigger a downgrade.

High-yield bonds sound enticing because they can reward investors handsomely, but risk is very high because they are a lower quality bond. All bonds carry ratings given to them by credit rating agencies. AAA is the best quality. Anything under A should be considered high risk.

Another way to buy bonds is through bond funds. It’s a good way to give your portfolio exposure to bonds but with diversification among dozens or even hundreds. The downside with bond funds is that losses sustained can be permanent because managers don’t hold them to maturity.

It’s generally a good idea to have a mix of stocks and bonds in a portfolio to offset market volatility.

The Hidden Costs of Commission-Free ETFs

Brokerage firms wouldn't offer commission-free ETFs if there wasn't a way for them to profit.

Big Corporations Are Buying Corporate Bonds

A report by The Wall Street Journal indicated that cash-rich companies have been seeking yield in the corporate bonds of companies like Verizon and Gilead.

Costco Stock: Slow and Steady

There wasn’t much to get excited about in Costco's fourth-quarter earnings report on Tuesday, but the real news was the way Costco stock has reacted.

Biotech Sector Bounce Looks to Be Coming

The biotech sector, as measured by the iShares Biotechnology ETF, is down more than 10% since Sept. 22.

What the New Model X Means for Tesla Stock

Tesla CEO Elon Musk reported Tuesday that 25,000 customers have pre-ordered the Model X, which translates to roughly $3.3 billion in sales for the new SUV.

More Recent Investing In Bonds Articles

View All Investing In Bonds Articles

Strike Price Offer

The Strike Price is your leading resource for insight into the world of options trading. Chief options analyst Andy Crowder will guide you through the best options strategies—telling you exactly where he's putting his money, and how you can make safe, reliable gains from some simple options trades. Your FREE subscription also includes Andy’s report "The One Vital Rule for Every Options Trade"—which reveals the #1 rule to achieve a high win-rate in every options trade.
You've successfully subscribed, click the link in your email to confirm your subscription.
There was an error, and you have not been subscribed, please try again.