A bond is a debt security item, similar to an IOU. An investor lends money to a company, and the company issues a bond to the investor in exchange. Depending on the terms of repayment, the issuer may have to regularly pay interest on the bond to the investor or pay off the debt by a specified date.
Why Should I Get a Bond Instead of Stocks?
Stocks can be a better investment, but the market is unpredictable in the short-term. On the other hand, bonds can be a good investment for retirement purposes, as well as for the short-term in certain situations.
When Would a Bond Be a Good Short-Term Investment?
An example of when a bond is a smart choice for a short-term investment is where a student planning to go to graduate school decides to work for a few years before enrolling. Since the student may need money in the relatively near future, a fixed income security such as a bond is a good investment. Any situation that would make more sense living under a fixed income makes a bond a rational choice.
What Are Some Characteristics of Bonds?
There are a few characteristics every investor should know about bonds in order to determine a bond's full value. These include:
- Face Value/ Par Value - The face value is the amount of money a bond holder will receive once the bond matures. The par value is what the bond is selling at. If the face value is higher than the par value, the bond is selling at a discount. If the face value is lower than the par value, the bond is selling at a premium.
- Coupon or the Interest Rate - This is the amount the bondholder will receive as interest payments. It is called the coupon because some bonds contain detachable coupons to tear off and redeem for interest.
- Maturity - The maturity date is the day when the bond is repaid. Maturities can range from one day to 30 years. One-year bonds are more predictable and less risky than 30-year bonds. The longer the time to maturity, the higher the interest rate. A longer term bond will also fluctuate more than a shorter term bond.
- Issuer - There are many factors to consider when determining what issuer to use such as:
- Default risk - Chance of debt being unpaid
- Yield - The annual percentage rate for interest
- Bond rating system - Aid for determining company's credit risk
Are There Different Kinds of Bonds?
There are several kinds of bonds, and some bonds fall under more than one bond classification. Here are some common bonds that many people have either encountered or at least heard of:
- War Bonds
- Municipal Bonds
- Retail Bonds
- Government Bonds
- Build America Bonds
- Junk Bonds
Do I Need a Lawyer Experienced in Investments?
Consultation with an attorney for most investment decisions is probably unnecessary. However, if there is a dispute with your broker, such as when you lose a significant part of your investment based on the broker's bad advice, you should contact a lawyer immediately. An experienced investments lawyer will help explain your rights as well as preserve any possible remedies you may have.