A Bond is really a certificate of debt. In the event that you hold a bond everything you hold is really a certificate stating that whoever issued that bond owes you money. When many people consider Bonds the first thing that comes in your thoughts are most likely the government bonds that their grandmothers bought for them and held to maturity and then gave to them as a gift for their 18th birthday. These bonds are issued by the U.S. government and are historically regarded as risk-free, which they are. The only way you could lose your cash is if the U.S. premium bonds UK invest government were to go broke. All of us know that will never happen. These bonds are issued by the U.S. treasury. What happens when you are buying bonds is that you loan the government your cash for a collection period of time. The Government then pays you interest on that loan every year. When the term of the loan has run out or as the saying goes in financial circles, once the bond has matured, the government then provides you with back the money that you loaned them in the first place. Sounds like a sweet deal right? It may be. The upside to buying bonds with the United States Government is that there surely is almost no risk you will lose the money that you invested and you is going to be earning interest on that money before bond matures. The downside to buying bonds is that although you will never lose the quantity of money that you invested there are other factors in play that can cause the purchasing power of the money that you're buying bonds to decrease. Translation: You will still be given back the quantity of money that you committed to the first place but that money is going to be worth less than it was once you invested it. That is caused by inflation.In short when I say that the purchasing power can decrease what I'm saying is that the your $100 can buy 30 gallons of gas today but it will only be able to buy 20 gallons of gas annually from now. Same money, less gas. That's the number one trouble with Government Bonds. Fortunately the Government also knows that this can be a problem and since they should keep the bond money to arrive to support all the spending they do they created an answer for this issue called Treasury Inflation Protected Securities.
Treasury Inflation Protected Securities are essentially the same as regular bonds. What makes Treasury Inflation Protected Securities different is that you don't get a regular rate of interest once you spend money on Treasury Inflation Protected Securities. What happens is that the interest rate that you're paid on your cash is add up to the rate of inflation. Like everything, buying bonds in this way is beneficial under certain conditions and harmful under others. If you had been to be committed to Treasury Inflation Protected Securities whilst the rate of inflation skyrocketed to double digits like what happened in the mid to late 1980's then your Treasury Inflation Protected Securities investment will make you very happy. However, if the rate of inflation is only 2% whilst the rate of interest paid out on the normal treasury bonds are 4% you then would be missing potential profits. I'm a fan of Treasury Inflation Protected Securities because when buying bonds in this way your cash won't lose its purchasing power and that alone may be worth the buying price of admission.
There are numerous strategies that may be used when buying bonds by the Government. These bonds are risk-free and are a good way of preserving your wealth. However,government issued bonds aren't the only real bonds on the market.
Municipal Bonds: The U.S. government is not the only real governmental entity that depends on raising money to cover its bills. Municipal Bonds are bonds that are issued by a city or other local government or their agencies. Municipal Bonds are riskier than U.S. government Bonds and for that reason Municipal Bonds usually pay an increased rate of interest than U.S. government bonds. One of the reasons an investor would choose to invest money in Municipal Bonds is due to the undeniable fact that more regularly than not the interest paid to the bond holder is exempt from federal income tax and from the income tax of the state that issued the bond. This can be a big deal because tax fee growth is the best sort of growth there is.
Corporate Bonds: Corporate bonds are among the few things in the world of finance that's just what it seems like: Bonds issued by a corporation. When corporations need to boost money they'll usually issue stock. That's standard procedure. However, issuing stock means diluting the value of the previously issued shares. This is not always a practical option and so to have around doing that the company will issue corporate bonds. Corporate bonds can be extremely risky or they can be extremely profitable depending on the company whose debt you purchase. The upside to Corporate Bonds is that the interest paid out on the debt is more regularly than not more than any U.S. or municipal bond. Another upside is that when the organization goes bankrupt the bondholders are paid prior to the shareholders. The downside to buying corporate bonds is that when the organization goes bankrupt and there's no money left after liquidation then it does not matter who gets paid first because nobody is going to be getting paid at all.
Buying Bonds is vital to nearly every portfolio since they are a good hedge contrary to the volatility of stock. Historically when stock prices drop, the interest rate on bonds go up and vice versa. I did not enter all the different types of bonds there are because my goal is only to get you to aware of their existence. However, if you would like more detail then follow my blog as I is going to be blogging about all the different types of bonds in the near future.