If you’ve ever thought about investing money, you know it can be a confusing process. There are hundreds of different ways to invest and thousands of different terms you need to know to understand them. Let’s read more to know whether one of the types of investments, such as bonds, will be the best option for our money.
What are Bonds?
If you’ve read this far, you’re probably interested in bonds. They’re commonly used as a low-risk way to grow your investment capital and income, and they can be a great way to diversify your portfolio. While there are many types of bonds, the two most common are government and corporate. Government bonds are issued by the U.S. Treasury, states, cities, and other governmental agencies. Corporate bonds are issued by corporations.
Although they’re similar, government bonds are safer and more predictable than corporate bonds because governments almost always pay back what they’ve borrowed. Corporate bonds, on the other hand, tend to be riskier because they can default on their debt payments.
The word “bonds” is used to describe a lot of different financial instruments. The word is also used as a shorthand way to describe what stocks are. In other words, if you own “stocks,” you also own “bonds.” If you only own “bonds,” you’re only invested in “bonds.” The key difference between the two is that when you buy a stock, you own a “piece of the company,” whereas when you buy a bond, you’re simply loaning money to a company or government.
Types of Bonds
Investing in bonds is a great way to make your money grow for the future. Bonds are a type of security called fixed-income security or debt security. They pay a set rate of interest until they mature and are only purchased by investors who want to earn interest income.
- Municipal bonds – Municipal bonds are a type of investment vehicle used by state and local governments to raise funds. When you buy a municipal bond, you are lending money to a state or municipality and are typically paid back with interest over several years.
- S. Treasuries – It’s not unusual for people to assume the U.S. Treasuries market is essentially a giant bond market, but the truth is a little more complicated than that. Suppose you buy a Treasury that is due in 10 years. You are now holding a security that pays out interest every six months (in the form of a T-Bill), but one that is backed by the ‘full faith and credit’ of the U.S. Government. In other words, you aren’t just buying a bond; you’re buying a piece of the American economy.
- Corporate bonds – Corporate bonds are debt securities that are issued by companies to finance business activities. Corporate bonds pay higher interest rates than government bonds since corporations are riskier and less stable than government entities. By purchasing corporate bonds, you are lending money to a company. However, if the company is unable to repay the bonds, you stand to lose some or all of your money.
- High Yield – They are debt securities that can be bought and sold on the financial markets and pay a coupon every six months, like a bond or bond fund pays interest. The difference is that high-yield bonds have a higher risk of default, which means you can lose some or all of your money. In return, you can get a better return.
- Investment-grade – Investment-grade is a term that refers to bonds with a credit rating that is considered at least investment grade by a recognized credit rating agency. That is, the rating is considered good enough to be used as collateral. Bonds with lower grades are often considered junk bonds and are riskier. While the term is most commonly used in the bond market, it can also be used to describe mutual fund ratings.
When you decide to invest in stocks, you’re buying a piece of a company. However, when you buy a bond, you’re making a loan to a company or government agency. There are many different kinds of bonds, and each one will have different features and benefits. As a result, you need to do your research to find the right one for you.