Bonds are promissory notes that can be issued by either the government or private business as a way to raise capital. These notes are issued in the hopes of raising money from external sources without putting strain on cash reserves.
What happens with this kind of investment is the investor offers cash and is given a bond. In exchange the investor will receive interest in addition to their original capital investment at the time of the bond’s designated date of maturity.
Here is brief description of the different kinds of bonds and what they mean:
This kind of bond is issued by the US Treasury Department. These bonds can be purchased at 50% of their face value (also known as par value) and accumulate interest during the specified time of the bond until it reaches maturity. When the bond reaches maturity, bondholders can expect to receive the face value amount listed on the bond.
This kind of bond is sold at a market price higher than the bond’s face value. The reason for this is because the current interest rates are listed at below the stated interest rate on the bond. This is done as an equalizing measure to make the bond attractive to investors, essentially leveling the platform.
Municipal bonds are issued by state or local governments and are frequently referred to as “munis”. The advantage to investing in munis is due to the fact they are exempt from federal taxes, and if the bondholder lives in the state issuing the muni, the investor is also exempt from having to pay state taxes. The drawbacks are the interest rate is lower than other kinds of bonds, and they do contain default risks because munis are subject to interest, callable and market rate risks.
Surety bonds involve at least three parties. The bond is contracted by one agency that issues the bond on behalf of another party; this party is called the oblige. This kind of bond is certified that the oblige will fulfill bond obligations to the bondholder. In the event the oblige defaults, the surety bond is insured to guarantee the investor of the bond receives their money.
Government bonds are issued by a country’s government in that country’s currency denomination. This kind of bond is typically considered to be risk free because the government guarantees repayment of the money invested.
Treasury bonds are issued by the US government and are pretty safe in terms of risk; this is the advantage. The disadvantage is that the rates on treasury bonds tend to decline when interest rates rise.
Bonds share many like characteristics, but each one has its own distinct features that are bond-specific. If you are considering investing in any kind of bond, no matter which kind, it is a good idea to do the research on the pros and cons of the types of bonds you’re interested in. This is important so the advantages and return on investment is known and any potential risks can be minimized.
Essentially bonds are considered to be long term contracts and the bondholder is considered a lender. While bonds are a way to raise capital, bondholders, unlike stockholders, do not have any claim on ownership.
Investing can be a good way to save money for the future. With today’s low interest rates it is a good idea to search around and learn about the different ways to invest money. This way you can make an educated decision on what the best type of investment for your situation. Bonds may be one option, but there are other options as well. It is always a good idea to know your options before investing money.