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What You Need to Know Before Buying Bonds

buying bondsIf you are looking for a low-risk investment with a steady yield that is generally considered more predictable than the stock market, consider buying bonds.  To watch a short explanatory video about bonds, click here.

What are bonds?

When you buy a bond, you essentially lend money to a government, municipality, or company. Bonds usually come with a fixed rate of interest and a maturity date on which you get back the money you paid out (or lent).  This amount is known as the “face value.” Additionally, during the bond’s lifetime, you receive regular interest payments.

Why invest in bonds?

Bonds have a fixed income, so presuming they don’t default, you know your investment’s return. Many bonds (like U.S. Treasuries) are low risk, giving their owners a sense of security. Other bonds, “junk bonds” are considered higher risk. In return for taking a larger risk, they offer a higher yield. Government bonds are unlikely to default, since they are backed by the full faith and credit of the government’s power to tax (though nothing is guaranteed). The low-risk nature of government or other high-quality bonds makes them an attractive investment if you are close to retirement or can’t sustain a heavy loss.

Bonds, compared to bank deposits, may be a good investment when interest rates are low. Oftentimes, folks looking for a low-risk investment put their money in the bank, but if interest rates are lower than inflation, they can end up losing the real value of their money. Although bonds are riskier than bank deposits, their relatively higher yield could be a better alternative as their interest rate may be higher than lower-yielding bank deposits.

A popular bond-buying strategy: bond laddering

You don’t need to put all of your money into a single bond. “Bond laddering,” where you invest in several bonds maturing at different times over a timeframe, is a useful strategy in maximizing return rates while not tying up your money for the long term. As each bond matures, you can either reinvest the money in another bond (hopefully with a better interest rate), or use the money for some other purpose. You’re not locked into a single rate of interest, as you would be if you put all of your money into one bond.

To learn more about investing in bonds, watch this 14-minute video.

 

Douglas Goldstein, CFP®, investment advisor, is the co-author with Grandmaster Susan Polgar of Rich As A King: How the Wisdom of Chess Can Make You a Grandmaster of Investing and director of Profile Investment Services, Ltd. which specializes in cross border investing and financial planning.

Profile Perspectives is a personal finance blog based on articles Doug Goldstein, CFP®, director of Profile Investment Services, Ltd., published in The Jerusalem Post. The information posted is purely informational and does not constitute investment or tax advice. Advertisements on the site are neither endorsements nor recommendations. Consult your professional advisors before making any investments based on articles or advertisements. Securities offered through Portfolio Resources Group, Inc., member of FINRA, SIPC, MSRB, FSI. Accounts carried by Pershing LLC., Member NYSE/SIPC, a subsidiary of The Bank of New York Mellon Corporation.

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