Basics of Investing in Bonds

Bonds You become a lender when you invest in bonds, and the issuer of the bond is your borrower. Bonds are an excellent option if you’re looking to bring in a steady income with the potential to beat inflation. Think about some of the following questions if you’re considering buying a bond:

• How much will you earn?
• When will interest be paid?
• How trustworthy is the borrower?
• How much is being borrowed?
• How long is the loan?

Once you make up your mind, you can make the choice of investing in either individual bonds or bond mutual funds. Regular, fixed income payments and maturity values that won’t fluctuate are the strong points of individual bonds. However, managing a portfolio of this type of bonds is more difficult than managing bond funds. While bond funds are easier to manage, the income payments and principal values can rise and fall based on market conditions.

There are several different types of bonds available for purchase, from safe, “investment grade” bonds such as Cat bonds, Bowie bonds, TIPS and Treasury Notes to riskier “below investment grade” bonds, the riskiest of all being “junk bonds.” There’s an entire industry dedicated to determining the safety of bonds and sharing that information with brokers and investors, so once you do your due diligence, investing in bonds should carry very little risk.