Investing in Bonds an Overview

There are a number of opportunities when it comes to making money through investing. Many people, though, when they think of investing immediately jump to stocks. However, stocks aren’t the only investments worth considering. You can also make money by investing in bonds. When it comes to asset allocation investing in bonds and other fixed income instruments play a critical role.

What are Bonds?

At the most basic level, bonds are loans. Bonds represent debt. An organization — often a business or a government — attempts to raise money by issuing bonds. These bonds are bought by investors looking for a return on their capital. The organization promises to repay the bonds with interest within a certain amount of time.

During the term of the bond, you usually receive interest payments. You might receive interest quarterly or annually. At the end of the term, the amount you paid in principal is returned to you. Bonds are generally considered safe when you purchase them from an entity that is considered stable and creditworthy.

More after the graphic.

Investing in bonds

Who Issues Bonds?

The bonds you are most likely to see are those issued by governments or companies. Many companies issue bonds to try to raise money for operating costs, and governments routinely sell bonds to cover their costs. Here are some of the more popular bond options:

  • Corporate Bonds: Companies issue bond to raise funds. These are bonds from various companies. Companies are given credit ratings meant to indicate how able they are likely to be to repay the obligation later. Companies with high ratings pay lower interest, since they are considered safer. Riskier bonds, though, can provide you with better returns — but you have to be on the alert for a default.
  • U.S. Treasuries: These are bonds issued by the U.S. government. Many consider them to be among the safest investments available. Treasuries generally have low interest yields, since they are considered just about as safe as cash.
  • Canadian Government Bonds: You can purchase three different types of Canadian government bonds, including marketable bonds, real return bonds, and Treasury bills. Once again, these securities are considered reasonably safe, since the Canadian government is considered stable and creditworthy.
  • Other Foreign Bonds: It’s possible to purchase other foreign bonds as well. Many countries issue bonds, and you can diversify your portfolio with bonds from different countries. Once again, the countries with higher credit ratings have lower interest yields. Many investors like to invest in emerging market bonds, since they have higher yields, and the growth means that they are likely to repay the bonds. However, there is still the chance of default.
  • Municipal Bonds: These are bonds issued by cities and states. The U.S. muni bond market is robust. And, you can also get tax breaks for investing in U.S. muni bonds.

Pay attention to the credit rating of the bond issuer. While these ratings aren’t full-proof, they can guide you, and provide you a basis for comparison. However, it’s important to remember that the ratings can be deceiving, and that there is always a chance of default — and you could lose some of your principal.

How to Invest in Bonds

The easiest way to invest in bonds is to check with your broker. Many brokers can help you purchase bonds from various organizations. Additionally, it is possible to purchase some bonds directly. Some governments have direct purchase programs. One of the most popular is the program offered by TreasuryDirect.gov. You can set up an account and invest in U.S. Treasuries.

You can also buy bond funds — no need to purchase them one at a time. There are bond mutual funds, bond index funds and fixed income ETFs that can provide you with the ability to diversify your bond holdings, all while keeping your costs down. Depending on the bond fund, it is possible to start with a relatively small amount of money — especially if you set up an automatic withdrawal option.

It’s possible to include bonds as part of an income portfolio, since you can use the interest. Additionally, you can reinvest the interest in other bonds if you are trying to build your portfolio. It’s important to pay attention to the term, though, since you don’t want to end up with all of your bonds coming due at once. You will need to keep them rolling if you plan to use bonds as an income investment.

Comments

  1. says

    I accept your article about investing in secured govt and corporate bonds. But investing only in bonds is also not a good idea. We need to diversify our investment.

  2. says

    I agree with that statement that bonds are LOANS, and The biggest market in the world is the “Bond Markets”, but I respectfully disagree with the that “BONDS” is a safe investment; because bonds is “savings”.

    Fore years most of the population assumed that US government and government municipal bonds were safe. Then, what happened with the financial crisis of 2007? This crisis was caused by the mortgage bonds, such as mortgage-backed securities or MBS, known as “derivatives” and proved that no bonds at all are safe in this economy. Many of these mortgage bonds were made up of “subprime mortgages” which were “high-risk loans” for high- risk borrowers. The ripple effect started are all over the world and countries such as Greece, Ireland, cannot pay the hight interest on their bonds.

    In USA, government and municipalities are going broke, because they cannot pay the interest on their bonds.

    So this prove that “bond market are unsafe” and for 2012, millions of american, millions of retirees, pension funds, governments and banks are in trouble.

    Also, China -which is holding more than 1 trillion dollars in U.S. bonds- can become the biggest “loser”, because the Federal Reserve Bank will continue printing more and more money through its insane QEs, devaluing the dollar, causing more inflation. And inflation make bonds more and more unsafe. Why? For instance, if a bond is paying you 4 % in interest and inflation is 10% – 20% (2014-2015) then all this money become nothing, NADA

    So if more trillions of dollars will be printed during 2012-2015 (before Depression and Hyperinflation install in USA), the value of the US Government bonds -bought by the Chinese Government- will go down. So that day (2014-2015) China will stop buying U.S. government bonds, american people will withdraw all their money from Stocks Markets, more flood of trillions of dollars, US Stocks Market will crash and the world economy will stop and crash.

    It happen before in so many countries and the history will be repeated.

    Thank You

  3. says

    At this time (2012) investing in Bonds and/or Stocks Markets does not make any sense at all. To share something, during 2000-2010 the return of the DJIA Stock Market was 0.2%, and 0.2% is absolutely NOTHING.
    The Stocks Markets in the world are following their END cycle and will crash very soon after USA Stocks Markets crash (2014-2015) ?? and USA will declare bankruptcy. That’s is my conclusion based on my personal research. It is much better to Invest in a another investing tool that provides you a great ROI. But the best investment is your FINANCIAL EDUCATION.

  4. says

    I personally think that anybody can make a wise decision the way “how to spend or invest their money” based on emotions or research and trends. Anybody has the chance 1) to invest in uncontrolled and risky investments such as bonds, stocks and mutual funds; or 2) invest in some commodities. Continuing saving money for the long-term does not have sense at all. WHY? because after world elections in 2012 and during 2013 all governments will continue printing more and more money and for that reason life savings and “long-term investments” will be wipe out. Continue learning more and more from successful people. FINANCIAL EDUCATION is always a MUST.

  5. says

    “BONDS” is NOT a safe investment; just because they are issued by a Government . If any government goes broke (like probably Greece or Spain) this Governments will not be able to pay the interest on their bonds, and all savers or bond investors will lose their money. Correct? YES.
    So this statement validates that “bond markets are unsafe”.
    Within this perspective, millions of people, millions of retirees, pension funds, governments and banks will be in trouble, in the next years.
    Also, if more trillions of US dollars will be printed during 2013-2015 (before Depression and Hyperinflation is installed in USA), the value of the US Government bonds will go down very badly. Now, when China stops buying US government bonds, USA economy will be in serious trouble; then, Federal Reserve Bank will print more money (QEs) so it will create more inflation (2013-2015) and as a result of this insane policy, US dollar will lose VALUE; making american people withdraw their invested money from Stocks Markets (2015??), and US Stocks Market will crash and the world economy will go in a Global Depression again.

    So why to Invest in Bonds?

  6. says

    Is it an accident what is happening in Greece, in many European Countries or USA? NO.
    It is a result of the Government Policies for many years in having emphasized LIABILITIES over ASSETS and Spending too much money for years.

    Is there any solution for the Greek people or European in general?

    Invest immediately in your FINANCIAL EDUCATION.

    Bailouts will not solve any problem. I think it will aggravate more, because it will create more taxes and more inflation.

    With FINANCIAL EDUCATION you can learn the difference between ASSETS and LIABILITIES, between CASH FLOW and CAPITAL GAINS, what is ROI, which vehicles allow us to get a Passive Income or a Residual Income, understand Market Cycles, etc, and so on.

    Why to give my money -with all my respect- and without any research to a financial planner, who will tell you “invest for the long-term and diversify” in this economy.

    The best way to INVEST and protect yourself now (2012) and forever is EDUCATING YOURSELF and LEARN how to invest and create your own business.

    HOW can you achieve that? FINANCIAL EDUCATION is the key.

    According to Jim Roger’s Book “Hot Commodities” A) Stocks Markets and Real Estate; compared with B) Commodities follow cycles and go in different directions: A) goes down; while B) goes up. Now, Commodities are in the Bull Market (UP) while Stock Markets are in the Bear Market (DOWN).

    If somebody “invested in mutual funds and stocks” for the long-term (let’s say from 2012 to 2022) it would be a complete disaster for them because they will lose all their money. As I said 2013 will be a critical year of a Global Recession to go into a “Global Depression” (maybe in 2015) and last for another 8 to 10 more years. Maybe I am wrong. Get FINANCIAL EDUCATION and then TAKE ACTION NOW.

  7. says

    Which one is more profitable in this Bear Market ? Bonds, Mutual Funds or Stocks ? None of them. Bonds, Mutual Funds or Stocks are risky assets at this moment. Never is too late, even if you are 50, or 60 or 70 years old and decide, to EDUCATE YOURSELF and LEARN how and where to put your money, how to protect yourself and your family, how to invest, etc.

    Anybody can get started by reading books from successful people, investors or being a member of great financial forum; and not simply follow the typical advice from financial planners, who will tell you most of the times “Invest your money in BONDS, or Mutual Funds, for the long-term and/or diversify your portfolio”. There are much better options than the traditional way of “putting your money in risky assets” (bonds, mutual funds and stocks).

    In my opinion, whoever put his/her money for the long term (bonds, mutual funds and stocks) will loose everything after US Stocks Markets collapses. Educate Financially continuously and you will win, and do not rely on politicians decisions or national elections. 2013 will be the year for global recession to enter into a Global Depression (2015-2016 ??) that which last for eight to ten more years.

  8. says

    It does no matter if you think your are too old being 50, or 60 or 70 years old and decide to EDUCATE YOURSELF and LEARN how and where to put your money, because for sure you will feel much better. You can read books from successful investors; and not follow the traditional pitch sale “Invest your money in mutual funds for the long-term and diversify your portfolio”. There are much better options than this traditional and obsolete way of “putting your money in risky assets” such Mutual Funds and Stocks. if you invest on those for the long term will loose everything after US Stocks Markets collapses. Learn more, attend seminars, read great articles and good books and then take action. You will never regret it.

  9. says

    This Global Recession is affecting all world economies; and unfortunately it will end up into a New Depression that I think it will be worse than Great Depression of the 1930’s. In the meantime and forever TAKING ACTION along with getting more FINANCIAL EDUCATION is a MUST. With this duet you can have more criteria in how to invest, how you can place your money, what is the best Return on our Investment (ROI), How you can control your money, How you can reduce the risk when you invest. In my personal opinion, probably the best criteria are: HOW you can control an investment, your ROI and reduce my investment risk.. and it is -with all my respect- a better choice than investing in stocks markets because you cannot control nor leverage, and mainly because it will crash in the next years. So what alternatives you might have A) “Get a Recession proof business” or B) “Investing in vehicles that provide you ROI” as long as you have done a great research on the markets, your team and your knowledge. Two great recession-proof business that can give you a good RESIDUAL INCOME might be at early phase of a great Network Marketing Company. More info at my blog.

  10. says

    Now, I would like to express an opinion about World Economy and Investments such Bonds, Mutual Funds, etc.

    Which lessons can we learn from Europe and USA Financial Turmoil?
    Is that OK if I can invest in Bonds or Stocks? Why?

    Some TIPS

    1) The best investment -as of 8 years old- is to EDUCATE FINANCIALLY and never stops even if you are 75 yo. A good advice is to play Cash Flow Game
    2) Try to understand how an “investment” works into a Financial Statement and see how you can control, leverage and get a good return on your investment (ROI)
    3) Learn ho you can get a nice cash flow from any investment, or a residual income from another business (i.e. MLM)
    4) Study Market Cycles and see how your investments will do according to them, and you can evaluate in you are in the right track… Look for Cash Flow.
    5) DO not rely on your job or pension income at all.
    6) Learn you can predict the FINANCIAL FUTURE by studying Demographics, Policies, and Market Cycles.
    7) Every problem is an OPPORTUNITY from a breakthrough
    8) Get a good Coach and Mentor and learn how you can make PROFIT even in the worst market.

    Following these simple TIPS nobody cannot tell you stories such as “invest for the long-term in Mutual Funds and Stocks and diversify”.

  11. says

    Investing in either Bonds or Mutual Funds means “giving your money to someone else expecting it will grow”. A lot of people invest in Bonds or Mutual Funds for as a Retirement Plan. Your Retirement Plan is not an Asset. It is an unfunded liability. Your retirement savings go to the rich who use your money to acquire their assets. It takes zero intelligence to save money. It takes zero financial education or financial intelligence to turn your money over to a financial planner. A great suggestion is after having a solid financial education invest. Do not give your money to other people.

  12. says

    Are there any differences about retirement plan between Greece and in USA and Canada? Yes, USA and Canada have a DC Plan, a defined-contribution plan, such as 401(k) in USA, RRSP in Canada. It means that Retirement Plan depends on your how much you have contributed to the pension plan. Where are Retirements Plans invested? STOCKS; now, if the stocks markets go down, workers with 401(k) and RRSP are in big trouble. theelevationgroupreviews dot blogspot dot com

  13. says

    A Traditional retirement plan gives you a deduction for savings today; but then you retire and pull out your money out of your retirement plan, you will be taxed at higher tax bracket. Does it make sense? The answer is no. What about if inflation is added during 2012-2015? It will be worse, because the purchasing power of your money will be devalued. Keep in mind that we are now in a Global recession going into a New Depression (2015-2017). Do not give up control of your money, by getting involved with a “traditional retirement plan”, where you can invest mostly in mutual funds, and your employer tells you when you can take your money out and use it. Get more financial education.
    theelevationgroupreviews dot blogspot dot com

  14. says

    Nice article Miranda. Two comments, it can pay to shop around when buying individual bonds, the spread which is the difference between what the broker pays for the bond and what they sell it to you for can vary widely. Also when it comes to funds, investors need to look at the duration of the fund, a quick way to measure the impact of a 1% change in interest rates on the value of the underlying portfolio. This will be very key once rates begin to rise.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>