Are Bonds a Good Investment?
Most of the time a bond is peddled as an investment that is safe, it is especially true for a newcomer that wants a stable return for their investment. However, it is not always a 100% risk-free investment.
The year 2018 is almost over and if you are looking into buying bonds today here is an in-depth explanation of why bonds are considered to be safe even though there are a few real risks involved with it.
A bond is a safer investment as compared to stocks
Although stocks and bonds are usually spoken about in the same breath, one clear difference between the two is the underlying equity and debt. When you buy a bond, you are leading money to the issuer which he agrees to pay back at the date of maturity date along with regular interest. Buying a bond is making a fixed-income investment at the same time the buyer is entitled to the agreed upon amount at the end of the period. If the company you have bonds in goes under the bondholders and creditors are usually the first ones that get paid off.
It is a Predictable Income
Bonds are usually considered a good investment as they are able to generate a stable income for the buyer. You will be able to get the same returns irrespective of if the company has a great year or if it is on the verge of collapse. However, on the other hand, the returns that you get with this kind of investment is usually lower than some other types. This is why a bond is the next step in your financial portfolio after you have been able to build regular savings. It is the preferred investment for people who are saving up for their retirement or for someone who wants to make a foundation before they move on to more riskier investments.
Not all Bonds are Equal
While bonds are technically safe, they are not always the same. When they talk about bonds, often people are talking about treasury bonds that are issued by the government. This is the safest kind of bond, but it also offers the lowest interest rate. A treasury bond is a long-term investment that can be used as an alternative to a savings account.
The other kind of bonds available is usually those issued by the municipality which is a little riskier than Treasury bonds.
A junk bond is the riskiest kind of bond available which are issued by a company that needs finance for a turnover. There is usually no guarantee that the turnover will happen or if the company will be successful after the turnover.
The most significant risk involved with bonds is that the interest rates are changing, as the interest rates increase the value of the bond drops. If you sell the bonds, you will end up with a lower amount than the investment, but if you keep the bonds, you will have to live with getting a lower interest than any person who buys the bonds at a higher rate.
This is the risk where the issuer of the bond will default on the payment and is not able to pay you back once the bond matures. Although this does not happen, often there is a risk of it happening if you buy municipal or company bonds.
This being said even though owning a bond may have lower risks than holding stock in the company it also comes with a lower interest rate. It is the best way for you to build a stable foundation and recognize that nothing is ever guaranteed but choosing the right option is often profitable.