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What You Should Know Before Investing in Bonds
A bond is typically a loan extended to the issuer the bondholders give their money in exchange for the bonds. The money is paid back together with an interest after the maturity period which is normally agreed upon while signing up for the bond. Bonds are popular with investors and to people who love venturing into finance because they make some good money. But before you wade into the ocean there are a few things you need to know about them. Bonds can be complex with confusing clauses and statements that if you do not understand their meaning you may end up investing your money in unnecessarily expensive bonds with unsatisfactory returns. Therefore, having a basic understanding of bonds can save your money, time, and frustrations that a few investors have experienced. To get you started with bonds this article has outlined a few things you need to know about them so continue reading.
The truth is bonds offer high interest on returns which is by far higher than what you can get from stock markets. Most bonds give an annual interest rate on returns that range between 8-15 percent while the total returns on the bonds if the holder maintains them until maturity normally ranges between 6-10 percent. These interest rates are higher than what most commercial banks give on deposit, therefore, meaning buying bonds from a reliable issuer can be better than savings but you need to be discreet about it. This is because the higher the returns the more the risks involved because bonds are not insured, unlike commercial bank savings. When you invest in bonds the only assurance you have of getting your principle is a guarantee of the issuer of the bond. Additionally, the interest rate you receive from the bond you purchased is dependent on financial stability and the strength of the issuer. Therefore, before committing your life savings in bonds do a thorough study of the bond issuer you intend to invest with. Assess the bond issuer’s financial strength and stability. One way you can do this is by checking their annual audited financial statements of the past few years to learn the financial history of the prospective bond issuer. Most people prefer government over corporate bonds because the risks involved in them are relatively low as the government will always pay although the payment can be delayed sometimes.
The other important thing you need to know about bonds is their maturity period. Maturity in bonds means the time the bond issuer pays the loan you lend them when you took them. If you kept your bond until the end of the maturity period you are supposed to receive your principal amount and accrued interests unless the bond issuer defaults. There are two primary types of bonds, short term with maturity between 2-3 years and long term with 10-30 years maturity period. The longer the maturity period the higher the interests you receive from the bond. Therefore, if you venture into bonds with the idea of investing that money in a few years short term bonds may be ideal for you. Hover, if your investment timeline is long the ideal investment plan is long-term bonds. However, assess carefully the financial stability and strength of the bond issuer before you make your final decision. Those are some important things you may need to have in mind while thinking of venturing into bonds.