Do you know about bond? It is a debt security provide by a corporation, municipality, goverment or other’s agency. To get profit from bond, you need to get payment from the issuer based on specified rate of interest. The bond concept need you make a formal contract between investor and issuer. Bonds can be purchased at face value or with a discount or a premium, depending on the interest rate of the bond and the bond market.
Why Invest In Bond ?
There are 4 main reason
Bond that combined with stock can give more stable portfolio.
Bond will pay on a regular basis and it is good for monthly income especially for those retired people.
Bond is more safety investment place.
Some of country give a tax free income for those invest in bond. It will give you lower yield return but you can saving a lot escape from tax.
Type of bonds
1. Savings bonds--> issued by the Treasury Department and are in low enough amounts to make them affordable for individuals.
2. I Bonds, –> issued by the Treasury Department and are adjusted for inflation every six months.
3. Junk bonds/High yield bonds–>it issue from corporate companies.
4. Corporate bonds,— > sold by the representative bank.
5. Savings bonds–> issued by the Treasury Department and are in low enough amounts to make them affordable for individuals.
6. Municipal bonds–> issued by various cities. These are tax free, but have slightly lower interest rates.
7. Treasury bonds –> issued by the Treasury Department but their investment is higher.
Risk of bonds
There’s a risk of investing of bonds such as :-
Inflation Risk: Because of their relative safety, bonds tend not to offer extraordinarily high returns. That makes them particularly vulnerable when inflation rises.
Interest rate risk: Bond prices have an inverse relationship to interest rates. When one rises, the other falls.
Default Risk: A bond is nothing more than a promise to repay the debt holder. And promises are made to be broken. Corporations go bankrupt. Cities and states default on muni bonds.
Source :- About.com