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What is a Bond?

Are you thinking of Investing in bonds? Bonds are a type of debt security offered by a lender who loans money, usually to a corporate body or government, as a form of investment over a fixed period with profit in view. A bond is often called an IOU(I owe you) between the Investor(also the lender) and the borrower, carrying all the transaction details. 

Why do Organizations sell bonds?

Financing and funding are significant aspects of any project, as nothing moves without proper funding. Corporate bodies sell bonds to individuals to start, continue or end projects. Governments also issue bonds to finance social and community projects like building schools and hospitals, fixing roads and security purposes. 

Why do Individuals/Corporate bodies Invest in Bonds?

Investing in bonds as an investor is a reliable way of keeping your money safe from impulse buying while still getting it to work and producing interest over time. Bond investing profits can be received biannually or quarterly during the stipulated investment time, while you expect your principal after the agreed time. 

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Bonds are also not prone to the extreme volatility and price change that comes with stocks and trading the global exchange as long as the investor is willing to keep the bond until maturity. Hence, an investor is sure to receive their principal after the fixed time of the bond has been completed.  

Types of Bonds 

In the USA, amidst the numerous bond types, all bonds can be categorised into four categories. These bond types are classified based on their issuer, which determines the taxing policy that guides the bond. They are Municipal, Corporate, Government and Agency Bonds. 

Municipal Bonds

Cities or Counties issue municipal bonds to further a project under the local government’s auspices. Municipal bonds are often attractive for investors with a large financial base and those who love to earn without taxing burdens at retirement because of their tax-free policies at the higher levels of government. 

Corporate Bonds

Corporate bonds are securities issued by private and public companies that need money to expand their operations, fund day-to-day activities and offset loans. Bond issuance is more favourable for companies because bank loans usually have a higher interest rate. Unlike Municipal Bonds, Corporate Bonds are taxed at the state and federal levels. 

Government Bonds

The U.S. Treasury Department issues Government Bonds on behalf of the U.S. government, which is why they are often referred to as Treasuries. Government bonds are a great way to invest because they carry the integrity of the United States government. 

Agency Bonds 

Agency bonds are issued by entities affiliated with the government. These bonds are usually not taxed at the state and local government levels but are taxed at the federal government level. 

Buying and Selling Bonds

If you are a patient investor who can wait till the maturity date, then you will not have a big concern when trading bonds because all you have to do is take your profits at intervals and the principal after the maturity. However, if you are the type that sells and buys bonds on the secondary market, then you will need to know that bonds’ market value will fluctuate just as stocks, and you are not trading the bond at face value. 

The downside of Investing in Bonds 

Just like any other investment, bonds have downsides. These risks, however, are not stop signs but caution signs for anyone making investments. 

• Bond issuers are more like borrowers, so there is a measure of credit risk involved.
• Acquiring a bond doesn’t appreciate the value of your deposit. Saving money is not an effective strategy in the growing inflation ravaging most economies. 
• Deciding to sell bonds before the maturity date poses a depreciation risk on the value of the bond.