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 repayment terms, 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 and 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 when a student planning to graduate school decides to work for a few years before enrolling. Since the student may need money soon, fixed income security such as a bond is good. Any situation that would make more sense living under a fixed income makes a bond a rational choice.
What Are Some Characteristics of Bonds?
Every investor should know a few characteristics about bonds to determine a bond’s full value. These include:
- Face Value/ Par Value – The face value is the amount of money a bondholder will receive once the bond matures. The par value is what the bond sells for. If the face value is higher than the par value, the bond sells at a discount. If the face value is lower than the par value, the bond is 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. Some bonds fall under more than one bond classification. Here are some common bonds:
- War Bonds
- Municipal Bonds
- Retail Bonds
- Government Bonds
- Build America Bonds
- Junk Bonds
What Is a Corporate Bond?
Companies issue corporate bonds to raise money for capital expenditures. Companies may use corporate bonds to finance operations or acquisitions of new companies. Corporate bonds are issued by all types of businesses and major industry groups.
Investors who buy corporate bonds lend their money to a company so that the company can finance activities going forward. In return, the company makes a legal commitment to pay interest on the principal.
What Are Mortgage-Backed Securities?
Mortgage-backed securities are bonds secured by home and real estate loans. Mortgage-backed securities are created when a number of loans with similar characteristics are pooled together.
These bonds turn the bank into a middleman between the homebuyer and the investment company. An investor who buys a mortgage-backed security lends money to the homebuyers. In order to be sold on the market, mortgage-backed securities must be issued by a government-sponsored enterprise or private financial company.
Investment funds such as mutual funds, closed-end funds, and exchange-traded funds pool money from investors and invest them by using a specific investment strategy. Investment funds can offer diversification and professional management to investors. Many investment funds use a wide variety of investment strategies and styles.
However, investment funds can be riskier than other investments and investment strategies. Investment funds can involve leverage or other derivatives.
What Is a Bond Lawyer?
Bond lawyers specialize in playing various roles when municipal bonds are issued. The term “municipal bonds” includes bonds, notes, revenue certificates, warrants, and other forms of debt issued by or on behalf of states. Territories, possessions of the United States, their political subdivisions, Native American tribes, and the District of Columbia can all issue bonds, too. Bond attorneys are required to pass the state bar exam and need a Juris Doctorate to practice law. Typically, bond lawyers work for government agencies or banks. Bond attorneys are well-trained in tax and security law.
Municipal bonds include general obligation bonds and notes. The bonds and notes pledge the full faith and credit of the issuer. Various bonds, notes, and other obligations are payable from limited revenue sources.
Capital expenditures in a locality, such as an infrastructure construction or school funding, may be exempt from federal, state, and local taxes. The tax-exempt status makes these bonds and notes appealing investment vehicles.
Bond attorneys investigate the intended purpose of the bond and research applicable laws accordingly. Bond lawyers also help government agencies or banks ascertain whether an issue is correct, complete, and properly structured.
Because bonds pledge the full faith and credit of the issuer, which is payable from a limited number of municipal revenue sources, strict attention to detail must be given to the interests of bondholders. An understanding of legal and financial requirements is critical to protecting the interests of bondholders. This understanding is also crucial to protect the interests of the funding bank when a bond attorney is representing a financial institution involved in issuing a bond or note.
The responsibilities of a bond attorney may include:
- Helping state or local governments develop strategies for structuring bond offerings
- Attending or presiding over bond hearings
- Managing the documentation for bond issuances
- Verifying sales with the Securities and Exchange Commission (SEC)
Bond lawyers should be experts in all facets of municipal issues. Municipal issues may include bonds, notes, revenue certificates, warrants, and other forms of debt. These debts may be issued by or on behalf of states, territories, and possessions of the United States. The political subdivisions of the U.S., Native American tribes, and the District of Columbia can also issue debt.
When working for a government or municipality, bond attorneys are responsible for raising funds to finance projects. Bond attorneys must ensure that the bond issuance is legal and helps the municipality.
When working for a bank, a bond attorney represents that the bank is providing the funding for the municipal project and that the bank will issue bonds.
Within the past few years, the U.S. Bureau of Labor Statistics estimated the median salary for all bond attorneys to be $122,960. The projected job growth for all lawyers, including bond attorneys, is expected to be 4% between now and 2029.
Do Bond Attorneys Lobby?
Industry groups will sometimes lobby on behalf of certain issues affecting their members. Bond attorney groups may lobby on behalf of issues affecting their lawyer members.
Do I Need a Lawyer Experienced in Investments?
Consultation with an attorney for most investment decisions is probably unnecessary. However, you should contact a lawyer immediately 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. An experienced financial lawyer will help explain your rights and preserve any possible remedies you may have.