19 Feb 2008 03:30:44 | Mika Hamilton
What are Bonds?
A bond is a debt security, by which you are lending money to a
government, municipality, corporation, federal agency or other
entity known as the issuer. In return for investing in the bond,
the issuer promises to pay you a specified rate of interest
during the life of the bond and to repay the face value of the
bond (the principal) when it becomes due.
Why Invest in Bonds?
It is always prudent for an investor to maintain a diversified
investment portfolio consisting of bonds, stocks and cash in
varying percentages, depending upon individual circumstances and
objectives. Bonds help you to diversify your portfolio, thereby,
reducing your risk exposure.
Investing in bonds provides a predictable stream of income and
repayment of principal.
Bonds maturing within three to five years will hold on to the
value that they are worth. They offer some protection against
stocks related losses in a portfolio.
The negative side of investing in bonds:
All investment products have drawbacks. Bonds are no exception.
Some of the negative aspects of investing in bonds are:
Most bonds have a call option. This gives the issuer the right
to call back the bonds held by investors generally after five to
ten years. When the issuer calls back a bond, it pays your
principal back along with the accrued interest and perhaps, a
small premium. Issuers adopt this strategy when they can obtain
money at interest rates lower than that of the bond in question.
When interest rates go up, the price at which the bond can be
sold goes down. If you are forced to sell the bond due to
pressing circumstances, you may not back the entire amount
invested resulting in losses.
Long-term bonds can tend to be volatile and can somtimes fail to
keep up with inflation.
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