You are investing in the debts of government entities or corporations when you buy bonds. A bond is merely evidence of a debt. It represents an IOU over the long-term.
Federal, state and local governments, agencies of the U.S. Government, corporations, and individuals can issue bonds. The issuing agency can raise capital by selling debt and promising to repay it with interest.
The issuing entity or company will tell you how much money they would like to borrow and for how long, as well as the interest rates that they are willing to pay. Buying bonds means that investors lend their money to the issuer, and become creditors. Bonds are usually sold at the face or par value. This is the price at the issuer of the bond. It is typically in $1,000 or $5,000 denominations.
You are lending money to the debtor by purchasing a bond. You will receive a note in exchange for the bond. It contains information such as the amount borrowed, the interest rate (the “coupon”, or “coupon rate”) and how often it will be paid.
The principal, which is the initial amount paid for the bond, must be repaid by the specified maturity date. You (a lender) will receive interest every six months before that date. Interest payments on bonds are typically fixed.
Bondholders used to be able to get coupons, which they would then clip and mail semi-annually in order receive interest payments. All bonds are now issued electronically in book-entry format.
When interest rates fluctuate, the market value for a bond can be at risk. The value of bonds that are already in existence will fall as the interest rate for new bonds rises. It can also happen the opposite. This phenomenon is only applicable if you sell your bond before it reaches maturity. You will be paid the interest and principal if you have a bond that reaches maturity. You should also consider the bond’s maturity date as well as your credit quality. Higher yielding investments come with a greater risk.
This post was written by All Seasons Wealth. At All Seasons Wealth, we provide expert advice and emphasize the importance of creating in-house portfolios to personalize your strategy for asset management, financial planning, and cash management. We utilize research and perform market analysis to provide you with a Financial Planner In St Petersburg FL. No matter your needs, we can work with you to develop a consulting solution tailored to you.
Any opinions are those of All Seasons Wealth and not necessarily those of RJFS or Raymond James. Investing involves risk and you may incur a profit or loss regardless of the strategy selected. Investing involves risk and you may incur a profit or loss regardless of the strategy selected. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment. Past performance may not be indicative of future results.
