Why should I invest in an individual bond?
The key benefits to owning individual bonds, barring bond default, are: A reliable income stream that is great for planning: If an investor has periodic upcoming expenses, like college tuition, having a reliable income stream can be great for planning.
Buying individual bonds can provide increased control and transparency, but typically requires a greater commitment of time and financial resources. Investing in bond funds can make it easier to achieve broad diversification with a lower dollar commitment, but offers less control.
An investment bond gives you the potential for medium to long-term growth on your money, over 5-10 years or more, along with fund management expertise.
Stocks offer an opportunity for higher long-term returns compared with bonds but come with greater risk. Bonds are generally more stable than stocks but have provided lower long-term returns. By owning a mix of different investments, you're diversifying your portfolio.
Advantages of Bonds
Bonds have a clear advantage over other securities. The volatility of bonds (especially short and medium dated bonds) is lower than that of equities (stocks). Thus bonds are generally viewed as safer investments than stocks.
The main difference is that an individual bond has a definite maturity date and a fund does not. If you hold a bond to maturity, on that date it will be redeemed at par, regardless of the level of interest rates prevailing on the bond's maturity date.
With risk comes reward.
Bonds are safer for a reason⎯ you can expect a lower return on your investment. Stocks, on the other hand, typically combine a certain amount of unpredictability in the short-term, with the potential for a better return on your investment.
- They provide a predictable income stream. ...
- If the bonds are held to maturity, bondholders get back the entire principal, so bonds are a way to preserve capital while investing.
- Bonds can help offset exposure to more volatile stock holdings.
| Pros | Cons |
|---|---|
| Can offer a stream of income | Exposes investors to credit and default risk |
| Can help diversify an investment portfolio and mitigate investment risk | Typically generate lower returns than other investments |
Investing in bonds when interest rates have peaked can yield higher returns. However, rising interest rates reward bond investors who reinvest their principal over time. It's hard to time the bond market. If your goal for investing in bonds is to reduce portfolio risk and volatility, it's best not to wait.
Why is it important to have an individual investment?
Investing is an effective way to put your money to work and potentially build wealth. Smart investing may allow your money to outpace inflation and increase in value. The greater growth potential of investing is primarily due to the power of compounding and the risk-return tradeoff.
- When buying individual stocks, you see reduced fees. You no longer have to pay the fund company an annual management fee for investing your assets. ...
- You understand what you own when you pick out the stock. ...
- It is easier to manage the taxes on your individual stocks.
There are two ways to make money on bonds: through interest payments and selling a bond for more than you paid. With most bonds, you'll get regular interest payments while you hold the bond. Most bonds have a fixed interest rate. Or, a fee you get to lend it.…
Bonds are issued by governments and corporations when they want to raise money. By buying a bond, you're giving the issuer a loan, and they agree to pay you back the face value of the loan on a specific date, and to pay you periodic interest payments along the way, usually twice a year.
Having said all of that, there are still some pros and cons of each approach because of how most bond funds are managed. Buying individual bonds: Could lead to higher trading fees (usually paid in the form of bid/ask spreads). Typically requires more money (depending on where you're trading).
A bond is an interest-bearing security that obligates the issuer to pay the bondholder a specified sum of money, usually at specific intervals (known as a coupon), and to repay the principal amount of the loan at maturity.
High-quality bond investments remain attractive. With yields on investment-grade-rated1 bonds still near 15-year highs,2 we believe investors should continue to consider intermediate- and longer-term bonds to lock in those high yields.
The people who purchase a bond receive interest payments during the bond's term (or for as long as they hold the bond) at the bond's stated interest rate. When the bond matures (the term of the bond expires), the company pays back the bondholder the bond's face value.
If you're the risk-averse type who truly can't bear the thought of losing money, bonds might be a more suitable investment for you than stocks. If you're heavily invested in stocks, bonds are a good way to diversify your portfolio and protect yourself from market volatility.
Investors who hold a bond to maturity (when it becomes due) get back the face value or "par value" of the bond.
What are two reasons people buy bonds?
- Regular Income That's Sometimes Tax-Free. ...
- Less Risky Than Stocks. ...
- Relatively High Returns.
Investing can change your life for the better. But many people mistakenly think that unless they have thousands of dollars lying around, there's no good place to put their money. The good news is that's simply not the case. You can start investing with $100 or even less.
Call risk is the likelihood that a bond's term will be cut short by the issuer if interest rates fall. Default risk is the chance that the issuer will be unable to meet its financial obligations. Inflation risk is the possibility that inflation will erode the value of a fixed-price bond issue.
Cash is the most liquid asset possible as it is already in the form of money. This includes physical cash, savings account balances, and checking account balances. It also includes cash from foreign countries, though some foreign currency may be difficult to convert to a more local currency.
- Bonds can be bought through a broker, an ETF or directly from the U.S. government.
- Buying and holding to maturity is one strategy for investing in bonds. Another is to sell early and make a profit.
- Before you buy, be sure to check the bond's rating to learn about its financial health.
References
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