Using Bonds
Synopsis
Whilst the term bond is mentioned and talked about considerably in financial circles few people outside of those circles really understand what a bond actually is. If we were to think of a bond as another form of an IOU it becomes easier to comprehend how bonds function.
About Bonds
A bond is a debt security in which the authorized issuer offers the holder a debt and depending on the terms of the bond the issuer is obliged to pay interest to use and or to repay the principal at a later date which is termed maturity.
A bond is in essence a type of loan. It provides the borrower with eternal funds to finance long term investments or in the case of Government bonds, to finance current expenditure.
Bonds offer much greater security than shares as there is virtually no risk involved. Bonds and treasury bonds are often utilized by investors when the stock market looks scary and unstable and there is a need for security.
Bonds perform differently to shares and move in the opposite direction of interest rates. When rates rise bonds fall and conversely when rates fall bonds will rise.
More complicated than shares, bonds come in an endless variety. For small investors considering debt investing the buying of bond mutual funds is advisable. Bond funds are free of the liquidity of individual bonds and investors can use them to diversify their holdings.
The security of bonds makes them a very attractive addition to any portfolio. The inclusion of bonds can keep a portfolio afloat. They are able to offer a cushion of stability against the unpredictability of stocks. People who are already retired or are entering retirement should ensure the inclusion of bonds in their investment portfolios as they will provide a certain income with minimal risk.
