Investing in Bonds is basically an I Owe You sold to the public in order to finance projects. In return for you buying the bond the company will offer you an interest on the money. Government and corporation’s issue these bonds to raise money for various projects such as road construction, ball parks, public transportation, expanding a business or other projects. When you invest you are loaning money to that company or government entity for a set period of time. They will in turn pay you back your initial loan and the interest on that loan. They are usually safe investments, but the interest is quite low.
They are also considered fixed income investments since the price and interest is set at the time you decide to buy the bond. When interest rates fall, prices rise, and vice versa. If you hold a bond to maturity (the date it expires), market price fluctuations do not matter. You will get back the original value of the investment along with all the interest promised when you bought it.
Investing in bonds is good for preserving money. The older you are the more likely you are to hold them in your investment portfolio. Financial planners will advise an individual to invest 70% in stocks and 30% in bonds, the older you get the more you want to be in these safe investment. When selecting your funds for your company’s 401(k) plan this maybe a gool solid recommended balance between the two asset classes. However, if you’re younger it is probably better to go with a higher percentage in stocks. Remember stocks are riskier investment, but the risk is worth the potential gains, historically stocks have out performed bonds.
Bonds sold by the U.S. Government’s Treasury Department are called Treasuries. State and local governments issue Municipal Bonds and public companies issues corporate bonds. Companies will make a public annoucement letting people know that they plan to raise money by selling bonds. If a company is not doing so well it may offer a higher interest in order to attract buyers, these are called Junk bonds and are rated by certain companies such as Morning Star. However, there is a risk that someday the company will not have the money to pay the interest payments and the bonds could default because the company went bankrupt for one of many reasons.
To figure out a yield, divide the amount of interest it will pay over the course of a year by its current price. If a $1,000 bond pays $100 a year in interest, its current yield is $100 divided by $1,000, or 10%.
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