What Do I Need to Know About Buying Bonds?
Money sitting in traditional checking or savings accounts usually loses value over time due to inflation. Even high-interest online accounts just started beating inflation rates over the last year. The best thing you can do with your excess cash (assuming you have extra) is to invest it and create more value.
As an investor, you have to decide where and how to invest your money. Many people choose to invest in stocks and/or real estate. While history shows these are solid wealth-building strategies over the long haul, they both come with some risk in the short-term.
If you don’t mind some risk for a potentially higher return, these two choices should be acceptable. Alternative investments should always be carefully considered because of the financial risks and possible tax consequences involved.
Are you more conservative and somewhat risk-averse? Then you may want to direct your investment dollars towards an investment vehicle offering a steady return with substantially lower risk. This is where buying bonds come in.
If you are curious about bond investing, read on to learn more about the topic. It’s important to understand the choice you’re making if you do decide to buy individual bonds or invest in bond funds.
What Are Bonds?
When you need cash to buy a home, or for unexpected expenses, you go to a lender and borrow money. Like you, businesses and government organizations sometimes need to borrow money.
Borrowing from a traditional lender is not always the best option because of high-interest costs and certain borrowing restrictions. When an organization needs to borrow, they can go straight to the investment community and sell bonds to raise cash.
A bond is a financial instrument to show agreement between a borrower and a lender. It’s similar to a promissory note in that it states the amount borrowed, the interest rate, a specified payment schedule, and due date.
Making Money From Bonds
There are many variations of bonds with a number of things differentiating one from another. At the most basic level, you’ll see a standard bond with terms dictating how income is paid based on a stated interest…
