Bonds sound boring, but they're not. They are more than just a nice safe haven for rich and retired folks who never want to lose money. They have an important role to play in your investment plan for many reasons.
First, bonds aren't stocks. Well-selected stocks tend to rise over the long run. But in the short run they can go drop, sometimes through no fault of their own. The same factors that depress stock prices, such as a recession or sluggish business conditions, tend to boost bond prices. Bonds and interest rates move in opposite directions. So, bonds can help to take the bite out of falling interest rates. This makes them ideal for diversifying and managing the risk of your investment risks.
Second, bonds usually produce a steady stream of income you can reinvest or use for living expenses. Bond prices may go up or down, but barring default on the part of the issuer, the income from a bond remains the same. Plus, Treasury securities and municipal bonds can generate some tax-free income.
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What is a Bond and How Do They Work?
Understand the core concepts of yield, maturity, interest and price.
Knowing the creditworthiness of your bond issuer can help limit the risk of default and maximize yield.
Learning about how to buy and sell a bond is just as important as why to buy or sell a bond. If you follow these tips, you'll be more likely to select good ones.
Bonds come in a variety of types, but they all share these basic traits.
Not all bonds are created equal. From agencies to zero-coupons, learn the basics behind a variety of bonds. Get to know all the different types and figure out which ones belong in your portfolio.
The Relationship Between Yield and Price
You'll know how much interest you'll receive from the beginning, but you can also profit from price moves on the secondary market. Understanding the relationship between yield and price is key to getting the most from the bonds in your portfolio.
This simple relationship between long- and short-term interest rates can tell you a lot about the bond market. By comparing long- and short-term bond yields, the yield curve describes future trends in bond returns.
Bonds have risks you won't find in other types of investments. You can learn to identify and evaluate the risks and see if they work to your advantage or disadvantage. Find out how to spot risky bonds and how to avoid them.
TYPES OF BONDS
These securities are attractive only to a select few. Zero-coupon bonds are cheaper to invest in than conventional bonds but have some unique characteristics that set them apart.
For safety, these bonds are the way to go. Securities issued by the U.S. government and its agencies are the choice of many risk-averse investors or investors looking to diversify and balance their portfolios.
These are close enough to government bonds in terms of safety, but make sure you're aware of the risks.
Safety, convenience and tax advantages are the strong points of these securities.
The higher your tax bracket, the more you'll benefit from these relatively safe bonds issued by state and local agencies.
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