While gathering information about bonds, we have to start by looking at the bonds definition itself. A bond is a debt security by which you are lending money to a government, municipality, corporation or any other entity known as the issuer. In return, the loan issuer promises to pay you a specified rate of interest during the life of the bond and then pay you the face value of the bond also called the principal when it becomes due.
Why is bonds investing getting so popular these days?
Well, it has always been prudent for any investor to maintain a diversified investment portfolio consisting of bonds, stocks and liquidity in varying percentages depending on individual circumstances and objectives. Many people across the financial world invest in bonds because they provide a predictable stream of income and repayment of income. Usually, they are considered to be a much safer and a more certain bet than other forms of investments.
The way you invest in bonds for the short-term or long-term basis depends on your investment goals and time frames. It will also depend on the amount of risks you are willing to take which also your tax status. Whenever you are considering a bonds investing strategy, you’ll need to remember the importance of diversification. It is not advisable to put all your assets and all your risks in the same investment basket. It would be much wiser to diversify your risks within your bond investments by creating a portfolio of several bonds each with different terms and characteristics.
While deciding on your investment plan and strategy, it would be sensible to also select bonds from different issuers. This will prevent you from the possibility that any one issuer may not be unable to meet its obligations to pay the interest and the principal. By choosing bonds of different types such as government, agency, corporate, municipal and mortgage-backed securities, it creates the needed protection from the possibility of losses in any particular market sector.
One objective of investing in bonds is to preserve principal and earn interest. If this is your main objective, you may then consider the ‘buy and hold strategy’. This is where you invest in a bond and hold it until maturity. You will get interest payments usually twice in a year depending on the investment contract. You will also receive the face value of the bond upon maturity. If you choose a callable bond, you may have your principal returned to you before maturity. These bonds may be called or redeemed early by the issuer when the interest rates are falling.
Your objective of bonds investing may be also to maximize income. If this is your objective, you may then go for higher coupons or longer-term bonds. With more time to maturity, longer-term bonds are more vulnerable to changes in interest rates. If you are a buy and hold investor for instance, these changes may not affect you in the least not unless you decide to change your investing strategy.