A sound diversified portfolio is incomplete without a significant percentage of bonds. Bond definition concept is basically loan where you serve as a bank. You loan out your money to a company, a city, the government – and they promise to pay you back in full, with regular interest payments. A city may issue bond for infrastructure development or the government may sell bonds to get out of spiraling debts.
Usually, you get semi-annual payments, providing you with a constant, predictable and stable income. That is why its also called fixed income security. Many people are investing in bonds because of preservation of their capital investment. Due to income flow, its is highly preferred in retirement and pension plans.
With freedom, bonds also come with a diverse range of options to choose from. That is why its very important to understand your investment threshold, timeline and risk preference.
1.- Government Bonds
Government issued fixed income securities are classified as below according to the time before maturity:
Bills – maturing in less than one year.
Notes – maturing in one to 10 years.
Bonds – maturing in more than 10 years.
Government securities and bonds are considered extremely safe. The debt of many developing countries, however, does carry substantial risk.
2.- Municipal Bonds
Municipal bonds are issued by state and local government. The interest is usually tax-free. The yield may be lower than the taxable bond. Its considered fairly safe as cities rarely go bankrupt.
3.- Corporate Bonds
A company can issue bond like it issues stock. They are usually of higher yield as there is greater risk involved of bankruptcy as compared to government. Higher the credit quality of company, the lower interest rate will be.
4.- Convertible Bonds
A corporate bond which can be converted into stock. It provides value to investor, that’s why it offers a lower rate of return.
5.- Callable Bond
A corporate bond in which company is allowed to redeem an issue prior to maturity. Usually a premium is paid to the bond owner when the bond is called.
6.- Junk Bond
A high-yield bond because of its high default risk.
7.- Angel Bond
Investment-grade bonds that pay a lower interest rate because of high credit rating.
8.- Green Bond
A tax-exempt bond issued to encourage sustainability and the development of underdeveloped sites. The projects are aimed at energy efficiency, pollution prevention, sustainable agriculture, fishery and forestry, clean transportation, sustainable water management, and the cultivation of environmentally friendly technologies.
Recently, National Bank of Abu Dhabi (NBAD) has initiated roadshows to issue benchmark size green bond for environmentally sustainable projects within the next 10 years in United Arab Emirates.
While investing in bonds help you reach your saving objective, few things must be kept in mind. Don’t reach for yield as high yield always come with lower credit quality. One should always keep their objective in mind. Also assess your risk profile. Do your homework. Do research and look up information on the Web. You should also read bond’s important characteristics, from yield to the bond’s call schedule.
Bonds are a safe and conservative investment. Like every investment, always take your time and then invest in your money for assured benefit over a long period of time.