Bonds are the lendings made to large organizations like corporations or the government body. They provide a fixed rate of interest and the organization pays the principal money back when the bond matures. These are a source of fixed-income and come under low-risk investment plans. People who invest in bonds or hold them are known as bondholders or creditors. There are various types of bonds. Let’s take a look at the various types of bonds:
- MUNICIPAL BONDS: Municipal bonds are also known as “Munis”. These are the lendings made to the local government or municipalities to fund for specific projects such as construction of roadways, bridges, towers etc. Some of the types of municipal bonds are: insured municipal bonds, anticipation notes, revenue bonds etc. the interest generated by these bonds are tax-free and hence they provide lower returns than taxable bonds.
- US TREASURY BILLS, BONDS AND NOTES: All these are types of bonds secured by the US government and hence, are one of the safest investments in the market. Treasury bills are short-term investments issued for a year or less, the maturity of treasury notes is 2-10 years and treasury bonds are issued for a tenure of 30 years.
- CORPORATE BONDS: Corporations can also issue bonds called corporate bonds. As corporations are more fluctuating and riskier than government bodies, the bands issued involve a risk-factor, but also promise higher ROI. Some of the corporate bonds are: straight-cash bonds,pay-in-kind bonds, split coupon bonds, deferred-interest bonds and multi-tranche bonds.
- FOREIGN BONDS: A freign bond is a bond issued in a domestic market by a foreign entity in the domestic market’s currency. The bond is traded on a foreign financial market and is expressed in a foreign currency. However they are very unstable and involve high currency risk.
- CONVERTIBLE BONDS: These are the type of corporate bonds that the bondholder can convert anytime into company’s shares. The number of shares is decided earlier. They offer higher yields than government bonds, but offer low interest rates than other corporate bonds.
- NON-CONVENTIONAL BONDS: The rates and tenure of non conventional bonds varies with time. Zero-coupon bonds are the most common type of non-conventional bonds. The investor receives the interest amount when the bonds mature. Still they have to pay the taxes on ROI, even if they don’t receive the interests annually.
- ADJUSTMENT BONDS: These are the bonds issued by the company due to the process of reorganization. The outstanding debt of the company is transferred to these bonds and are given to bondholders. They pay interests only when the company generates earnings.
- JUNK BONDS: These are the corporate bonds with the lowest rating possible. They involve high-risk and provide high returns. These are speculative and hence you should approach carefully.
There are two ways in which you can generate money from bonds. The simple one is to hold on to the bond until it matures and receive the interests annually. And the second one is to sell the bond before its maturity at a higher price than what you paid for the bond. It will be a good idea to sell the bond when the bond prices rise.
ADVANTAGES OF INVESTING IN BONDS:
- LOW-RISK: Bonds are not market-linked hence their value doesn’t fluctuate more. They are comparatively a safe investment plan. People with low-risk appetite can easily go for bonds as an investment option.
- FIXED INCOME SOURCE: Bonds act as a fixed income source for the investors as it provides interest annually or even twice a year.
- PROFIT ON RESALE: If the value of the bond rises, the investor can sell the bond for a higher value than what he paid, before the maturity to earn a good amount of profit on it.
DRAWBACKS OF INVESTING IN BONDS:
- INTEREST RATE: If you invest in bonds for a longer period, then there might be chances that the value of bond goes down, in such a case, the interest rate may reduce declining income.
- INFLATION: Over the long-run, inflation acts reducing the purchasing power of the investor, if he receives the fixed rate of interest.
- LOW RETURNS: Bonds provide relatively lower returns as compared to market-linked investments.
Are bonds a good source of fixed-income? Is it better to go for bonds than stocks? Why should you go for bonds over any other investment plans? All these might seem confusing, but ultimately, your needs, risk appetite and financial goals will decide which investment plan is best suited for you. If you are someone with lower risk appetite and cautious about losing your hard earned money, then bonds are a better suited investment option for you rather than stocks. Also, if you are near your retirement, it is advised to invest in bonds, as they are secured, and will provide a fixed-income source for you post-retirement. It is always better to invest in multiple plans rather than focussing on a single investment option to grow your wealth. If you are already into stocks and mutual funds, you can still opt for bonds as an investment option to widen your portfolio.