General Bond Investments
Bond Investment is one of the safest investments you can make in the long term. It is not that investing in bonds is a risk-free proportion or the underlying economics is simple, but with some careful planning and calculation, anyone could turn it into a much profitable business, than many other popular investment vehicles. Hence, the first step in bond investment is to learn the tricks of the trade before throwing one’s hat into the fray. Definitely, it is not at all a difficult task to do.
Once learnt the basic intricacies of bonds, the next step forward is to choose a suitable bond market to test the waters. One of the easiest and popular bond markets is the municipal securities, which is essentially centered on selling and buying bonds in cities or states. Also, when an investor invests in municipal securities, it automatically becomes a sort of social contribution as well since it is this money that is diverted to build public systems and schools. Risk is average.
Another bond worth putting your money in is the federal bond. The risk factor with Federal bonds is lesser than state bonds. Another aspect with federal bonds is that they are generally long term. For example, treasury securities market has bonds whose maturity period is not less than a minimum of ten years. From an investor’s perspective, however, this is good news since such long term bonds definitely guarantee a good enough profit.
Corporate bonds, which are sold through public security markets, have higher interest rates and hence are more lucrative for the investor. Foreign bonds, on the other hand, are difficult to lay hands on and its risk factor is also high.
Risks
Risks associated with bonds are two-fold – credit risk and interest rate risk.
Credit risk refers to the risk factor associated with the fall of credit rating of the issuer. If that happens, then the value of bond will also crash down. Such scenario is common with auto manufacturers and airline bonds. Government bonds are generally immune to this phenomenon. However, there are exceptions like Iraq at present and Argentina and Brazil few years back.
On the other hand, interest rate risk refers to the phenomenon in which the value of bonds falls when the interest rates rise. The economics behind it is quite simple – when the interest rates or current yield rise, the new bonds issues naturally happen at higher interest rates than the old issues. This would tantamount to lose in value for the old issues. Its converse phenomenon can also happen however.
One more aspect one need to know about investing in bonds is that he/she cannot get the money back until the bond matures. In other words, bond investment is a long-term investment proportion by default. In between, the investor could receive interests twice a year or so. Hence, if you are looking for returns in a shorter time frame, invest in short term bonds of one or two years. But, then the returns will also be not substantial. For better profits, one may have to go for long term bonds.
