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Bond Investing Basics – A Brief Overview To Bond Investments

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Introduction

 

 

 

You may have heard of the term “bond” at least once in your life. From bail bonds to savings bonds, treasuries to municipalities, corporate bonds, convertible bonds – just to name a few. But what are they? How do they work? Are they safe and should this be an asset that I should even consider? How do I purchase a bond? How to find bonds that are right for me and my investing strategies in the next 5, 10, or even 30 plus years?

And by the end of this module, you will have a more through understanding of what bonds are, how they work, analyzing and reading real bond data through research and fundamental analysis, the risks and benefits of bonds as fixed income assets as you incorporate these into your investing portfolio, and most importantly, how to make your money from bonds work for you. Whether you are on the verge of retirement and are looking for a steady stream of income or are looking to invest in fixed income assets at an early age to allow your profits to continue to compound in decades, Invest In Wall Street has you covered as we divulge more into another important asset class : Bonds and Other Fixed Income Assets.

But before we get too ahead of ourselves, we must first gain a general understanding of what a bond is – which will be covered in more detail as you continue to read more about the bond investing basics to establish and strengthen your knowledge on bonds.

 

Before we begin, we would like you to read and agree to the Terms & Conditions of this post before you proceed any further.

Disclaimer: Invest In Wall Street is in no way financially or legally responsible for any investing decisions made by any of our readers and are, in turn, acting on their own free will. The information in this article is purely educational and should not be abused or misconstrued in any way, shape, or form.

Bond Investing 101: Bond Investing Basics

 

A bond is a fixed income investment where an investor loans money to the government, a company, or any other entity.

Companies and governments issue bonds frequently to fund new projects or ongoing expenses. By issuing a bond the company or government borrows money from investors who in return, are paid interest for the money they loaned.

Some investors use bonds in hopes of preserving the money they have while also generating additional income.

 

 

 

Bonds are often viewed as a less risky alternative to stocks and are sometimes used to diversify a portfolio – since bonds offer regularly scheduled payments and the return of invested principal bonds are often viewed as a more predictable and stable form of investing.

Of course like any investment bonds are not without risk. One risk that bond investors face is the possibility that the issuer defaults on paying the principal – in what is otherwise known as default risk. Bonds with a higher default risk also comes with a higher coupon rate since the amount of risk is dependent on the financial stability of the issuer.

 

 

For an example, most governments are generally considered stable issuers and issue bonds with a relatively low coupon rates. Corporate bonds typically represent a greater risk of defaulting, since companies can and do go bankrupt. This is why corporate bonds often offer a higher coupon rate.

Several credit rating agencies assign rankings to different bonds. This can help bond investors gauge the financial strength of the bond issuer.

These rating agencies often use different criteria for measuring risk, so it’s a good idea to compare ratings when considering a particular bond.

Keep in mind that rating agencies are not always accurate so be sure to research a bond and it’s risk thoroughly before investing.

Another risk to consider is interest rate risk. This is the risk that interest rates will go up and any bonds you own will be worth less if sold before the maturity date. When interest rates rise, more investors allocate their money into the new higher interest rate bonds.

If you wanted to unload a low interest rate bond to take advantage of these new rates, you will have to sell your bond at a discount to make it a worthwhile purchase for another investor.

Capital preservation and income generation are just two ways that bonds might be part of a diversified portfolio. Many investors use a mix of stocks and bonds to pursue their investment goals. And because bonds move differently from stocks they can help increase or protect portfolio returns.

 

 

Quick Recap

In Review…..


Bonds

  • A bond is a fixed income investment where an investor loans money to the government, a company, or any other entity
  • Companies and governments issue bonds frequently to fund new projects or ongoing expenses. By issuing a bond the company or government borrows money from investors who in return, are paid interest for the money they loaned
  • Some investors use bonds in hopes of preserving the money they have while also generating additional income.
  • Bonds are often viewed as a less risky alternative to stocks and are sometimes used to diversify a portfolio – since bonds offer regularly scheduled payments and the return of invested principal bonds are often viewed as a more predictable and stable form of investing
  • Of course like any investment bonds are not without risk. One risk that bond investors face is the possibility that the issuer defaults on paying the principal – in what is otherwise known as default risk. Bonds with a higher default risk also comes with a higher coupon rate since the amount of risk is dependent on the financial stability of the issuer
  • For an example, most governments are generally considered stable issuers and issue bonds with a relatively low coupon rates. Corporate bonds typically represent a greater risk of defaulting, since companies can and do go bankrupt. This is why corporate bonds often offer a higher coupon rate
  • Several credit rating agencies assign rankings to different bonds. This can help bond investors gauge the financial strength of the bond issuer
  • These rating agencies often use different criteria for measuring risk, so it’s a good idea to compare ratings when considering a particular bond
  • Keep in mind that rating agencies are not always accurate so be sure to research a bond and it’s risk thoroughly before investing
  • Another risk to consider is interest rate risk. This is the risk that interest rates will go up and any bonds you own will be worth less if sold before the maturity date. When interest rates rise, more investors allocate their money into the new higher interest rate bonds
  • Capital preservation and income generation are just two ways that bonds might be part of a diversified portfolio. Many investors use a mix of stocks and bonds to pursue their investment goals. And because bonds move differently from stocks they can help increase or protect portfolio returns

 

 

 

And that is the basics of bond investing. As you continue more and more with your bond education here at Invest In Wall Street, you will find that it will become easier to read and analyze bonds – as you will surely make the best investment decisions that meets your own tailored needs.

I hope you have enjoyed this post and found the information to be quite useful. If you have any questions or concerns, please feel free to leave them down in the comment thread below and make sure to like and share this post.


 

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