Investing in Bonds

While managing finances, why invest in Bonds?

Growing in a third world country, saving money for rainy days is a very common practice. At times, on kids birthday’s many relatives and friends give prize bonds instead of gift cards. At that time, being in childhood, what a bond is and how it does works, was not easy to explain. While studying for managing finances, a lot of resources talk about the stock investments, retirement plans and bonds’ investment. This blog will provide information about the bond investments and how it works. In near future the blogs will include about the retirement plans and stock investments. While personal managing finances, it is important to invest money at the right place. Bonds can bring in money and at the end of maturity date, they pay back the same amount, invested earlier.

What is a Bond and how does it work?

Whenever a bond is bought or the money which is invested in a bond, the investor (person who has bought the bond) lends the money to an organization or industry.  When a bond is bought it will have a maturity date, at that time the investor gets the principal money back. Principal money means whatever amount is invested will be paid back. Bonds also have an interest rate. Most of the time the interest rate is fixed. For example if an investor buys a five-year bond, of 5-percent issued by WalMart, then the investor lends money to WalMart for five years at an interest rate of fine-percent. This means if an investor, invests a $1000 of 5% interest than he/she will get $50 every year on that investment. However, after five years when the bond is matures, investor can take back the $1000 back from the WalMart which is called the principal money. The interest money is paid annually or at time semi-annually.

“The value of the bond moves opposite of the directional change in interest rate” (Tyson 177). An increase in the interest rates causes decrease the value of the bond. For example if the investor holding the bond at 5-percent and the company’s interest rate increases to 7-percent. Then, upon comparing with newly issued bonds of 7-percent interest, the previous issued bond of 5-percent interest decreases in value.

In general Bonds differ in the following main ways:

1)      Duration of the maturity of a bond: Short term bond usually have a maturity date with in a few years and the intermediate bond maturity date is in between three years to ten years. With the long term bonds, the maturity date comes within thirty years. The long term bond offers a high interest rate but that can decrease the value of the bond itself due to the change in interest rate over that long period of time.

2)      Credit quality of the organization to whom investor lends money: This means that the borrower will pay the interest and the principal money back at the agreed terms and dates.

3)      Different types of institutions to whom investor lends money: There are many  institutions which issues bonds. The bonds issued by state or local government are called municipal bond. Bonds issued by the federal government, means lending money to Federal government. Another type is corporate bonds issued by the corporations.

To summarize the information about investing finances in bonds, the video above helps to understand it easily as well.

If you want to invest money in bonds the video clip below talks about bonds information is much more detail. For this blog, this video helped me to understand why investing in bonds is saver than investing in stocks, if the a company file for bankruptcy.
Also it is very important to check the credit-rating agencies for investment safety on a scale where AAA is the highest possible rate which also explained in the video clip below. I hope you will like this blog and the informative videos.

 

   Tyson, Eric. Understanding Your Investment Choices. 6th ed. New Jersey: Wiley Publishing, Inc., 2010. 175-177. Print.

Etrade, , comp. "What is a bond? ETRADE, INVESTING AND TRADING EDUCATION." What is a bond?. ETRADE, 25 September 2012. web. 19 Sep 2013.http://www.youtube.com/watch?v=O2IiwstF_UE.