When you purchase a bond, you lend money to an entity that borrows the funds for a fixed amount of time. This entity pays a fixed interest rate on the money you lent. U.S. savings bonds are the most well-known type of bond, but they're not the only kind. Companies, as well as local, state and foreign governments also issue bonds. Every investor should consider bonds because of the major advantages they offer.
The entity from which you purchase a bond guarantees it will return your money at the designated time, along with interest. Few other investments offer such security. Even if you lose your bond certificate or it gets stolen, you can have it replaced at no cost. Investing in stocks might promise greater rewards, but if you make the wrong investment, obviously you could lose your money. Making riskier investments is wise only when you have a diverse investment portfolio that also includes safer options, such as bonds.
The fact that bonds provide a definite return allows you to plan for the future effectively. If you purchase bonds from a corporation, you'll usually receive interest that accumulated at a fixed rate every six months. For U.S. Treasury bonds, you'll receive interest that accumulated at a fixed rate when you cash the bond. Bonds have traditionally been a popular gift and means of saving for college because of their definite pay-off. With bonds, families know exactly how much money they'll have in the bank when the children reach college age.
Easy to Understand
Similarly, you don't have to be a financial planner to understand how bonds work. You pay a set amount of money, and at a specific time, you receive more money. Even children can understand the concept of receiving a bond as a gift, although they might not feel as excited about bonds as cash. Because of their simplicity, bonds can help new investors to grow comfortable with the concept of investing their funds.
Despite the security bonds offer, choose them wisely. Investing in a new company comes with risk, even if you purchase bonds instead of stocks. Likewise, if you purchase bonds from a foreign government that cannot pay them back, you may have a difficult time gaining back your funds. Purchase bonds from reliable sources instead, like the U.S. government or large, high-performing corporations. Similarly, don't purchase all of your bonds from one source, as suggested in "The Complete Guide to Investing in Bonds and Bond Funds."
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