Bonds are primarily offered by your bank or institution when you lend them money. They issue bonds that promise to pay you back the principal amount together with interest accumulated during the duration agreed on.
The central question that most people ask is whether or not bonds are risk-free. Investment bonds are not exclusively risk-free. However, it has low-risk attributes. When you buy corporate bonds, it means that you are purchasing a claim to the corporation’s assets. Just like an ordinary person, even big companies and organisations tend to take on debts, which must be paid back after a given period. These agencies take securities in trust to profit from it. A corporation should not take up too much debt to the point that they won’t be able to pay the whole amount borrowed. If this happens, the company will be bankrupt. When an organisation files for bankruptcy they will be unable to pay up the bonds that you purchased from them. What this means is that as an investor you will not be able to gain from your investment. However, fortunately, bonds are rarely lost through bankruptcy.
An advantage of bonds is that you can sell them to the market anytime. Stock bonds come with an assigned value that is usually determined by the market. When you sell these bonds on the open market, you should remember that people will always inquire to know the interest rate on the bonds get-out clause and the price that the market values are at. This means that there is a slight chance that you might end up getting a lower price than what you had bought the bonds at when you decide to sell them.
Different types of bonds
Government bonds- When the government wishes to build finances, they may choose to issue bonds. These types of bonds are usually risk-free and can be granted with tax exemptions.
Corporate bonds- These bonds do not have tax exemptions and are usually risky regardless of the size of the corporate company.
Saving bonds- The government can issue these bonds. The most significant advantage of these is the tax exemptions similar to mutual bonds.
It is essential to understand the different types of bonds before you choose to invest in one of them. Some of the factors that you need to put in mind include fiscal holdbacks, maturity period, and purchase cost. In general, bonds offer lower returns when compared to other investments such as real estate. However, you will not be exposed to high levels of risk.