Should You Invest in Bonds?
There are many things that you can invest in, so you can put your money to where it should be that can profit you, in the end. One such example is bonds. But just like most things, there are risks in making bond investments; even arbitrage bonds have risks. Investors who are wondering if they will be safe if they go back into bonds have one thing in mind: they know that there is a real risk in bonds that some other investors don’t realize.
Nonetheless, investing in bonds is not all that bad if you know what you are doing and where you are going. There are many things that you need to remember if you want to make bond investments. You have to consider the timing of getting in and out of your asset classes. However, you should not only do this step when you make bond investments. You should never distract yourself from the more productive goal of maintaining your financial health in the long run. You need to know how bonds work and what bond types are out there if you want to use the right investment strategy to meet all of your financial goals.
The bond market is going through changes, and its present state may not be the same as its state in the past. Before you get into the bond market, you have first to know what is a bond and what it can do for you and your finances. While there are technical variations, you may think of a bond as a tradable type loan. Bonds are the obligation of the issuer who acts as the borrower. The borrower repays a particular sum along with the interest to the bondholder or lender. Often, bonds are issued with a face value or a par of $1,000. You get the declared interest rate of the bond by dividing the total annual interest payments with the initial value of the bond. For example, for an initial $1,000 investment with a bond that pays $50 interest each year, what is stated will be an interest rate of 5%.
The above computation is straightforward. However, when there is the issuance of bonds, the actual principal value or price of the bond will change because of a range of factors. These factors include the available overall level of interest rates in the market, the expected inflation rate, the issuer’s perceived creditworthiness, investor’s general appetite for risk, the amount of time left until the bond’s maturity, and the supply and demand for the specific bond.
While you often perceive bonds as safer investments in comparison to stocks, the idea behind the notion is quite perplexing. Once you trade bonds on the open market, you can’t always guarantee that the bonds of your company will be safer than its stocks. The prices of both bonds and stocks fluctuate. So, the relative investment risk is factored in by its price. As long as all markets are entirely efficient, you can conclude that a bond will be much safer than a stock. You can’t always expect this case, though. It is also possible that the stock of a company is more reliable than the issued bond of another company.