BOND INVESTING GUIDE

One of the most well-known strategies for investors to make money is through bond investments. These can be defined simply as loans where the bond buyer or lender lends a certain amount of money to the bond issuer or borrower. Bonds work through interest payments done at a pre-determined amount of time. Once the payment is complete, the principal or the money that was initially borrowed will be paid back to the original investor.

What Is A Bond Investment?

A "bond" is a term commonly used for debt issues that have repayment periods for more than ten years. If the repayment period is less than ten years but more than one year, this is more properly called a "note". However, if the repayment period is less than one year, this can be referred to as a "bill".

Bond investments are typically issued similarly as stocks. Investment banks buy bond offerings and re-sell them to investors. If you are referring to government bonds, these are generally auctioned off. There are several reasons why investment companies issue bonds. The primary reason is to raise funds. Though they have the option of issuing stocks, an advantage companies can experience with bonds is that control of the company or any profits gained won't be lost.

Several parties are responsible for issuing bonds including the Federal government, state and municipal governments, as well as corporations. People or investors buy bonds simply because these offer them a decent amount of returns with little risk. A trick with most investors when it comes to buying bonds is to sell them for a higher price. Since bond prices fluctuate a lot, investors need only know the trend and they can successfully buy bonds at a low price and sell them at a high price to gain profit.

Risks Of Investing In Bonds

Bond investments carry with them several risks. First is known as the default risk where there is a probability that the borrower won't be able to pay back the principal borrowed. The second is known as the interest rate risk wherein bond prices are prone to the risk of falling prices owing to an increase in interest rates. This is more evident with long-term bonds because the longer the maturity of a bond, the higher the interest rate risk since long-term bonds are more prone to interest-rate changes. This risk is often also called as duration risks.

The third risk involved in bond investments is called the liquidity risk. This risk essentially spells out the probability that there won't be as many buyers as you expected during the time you want to sell your bonds. The fourth risk is called the market risk where the bond market is addressed in general. The bond market can drop primarily because of the preferences of investors, their asset allocations and other similar reasons. Last is the inflation risk, since this occurrence can devalue the worth of your money. When this happens, the interest payments in the future for your bonds will be worth a lot less. On the other hand, inflation can also raise interest rates, which in turn devalues bonds.

Making Money Investing In Bonds

These risks can mean bad news for beginning and experienced investors alike but can be avoided through risk management strategies and research. Bond investments can yield a lot of benefits and a lot of profit especially if weighed properly.