Bonds - Investing in Bonds for a Secured Future

There may have been more than one occasion when you might have had to borrow money from a friend: at the coffee shop, in the office, or even for the cab service. When you run out of money, borrowing is usually your only way out. Juxtaposing the same with big corporations and the federal government, one would find it is not that easy for them. Not only have they to repay the money owed, but to top that amount with interest. That is why companies are made to sign a ‘bond’ by law, promising the repayment of the money owed. It is a formal kind of security to ensure due payment.

However, certain criteria ought to be considered before investing in a bond. Let us take a short tour through how investing in a bond could benefit you.

Before Investing

The working of a bond primarily depends on whether you need to invest money for a long or short term. Besides, it also depends on your tax status, the period and investment goals. There are some basic strategies on hand, which should be considered before making any investments. For instance, putting all your assets and risks in one single asset class would not be a good idea. It is better to diversify the risks by creating a portfolio of several bonds within the bond. By choosing different issuer’s bonds, you could protect yourself from the possibility that one of the issuer’s may not be able to pay back the amount owed.

After Investing

After investing, a par value, or the amount of money the investor receives after maturity of the bond, is calculated. This means the amount (principal) owed should be returned to the investor. The coupon rate is the amount received by the bondholder as the percentage of the par value. Lastly, a maturity date is arrived at wherein the bond issuer needs to return the principal amount to the lender.

To arrive at how much a bond would yield, one could divide the amount of interest paid over the course of a year by the current price of the bond. Prices of bonds fluctuate; hence, the current price is always taken into consideration. However, if you decide to sell before the maturity date, it is advisable to do it at the current rate of the market.

Securing a number of bonds gives the owner a good credit rating and helps to prove his or her financial stability.

Types of bonds

There are different types of bonds available. For example, government, corporate, agency, mortgage-backed securities, municipal, etc. In addition, different maturity level bonds are also available; these help in managing the interest rate risk.

1. The treasury bonds available from the US government have maturity dates ranging from 3 to 5 months to thirty years.

2. Corporate bonds, on the other hand, which are sold through public security markets, are a little risky and have high interest rates.

3. Local and state government bonds have higher interest rates, as unlike the federal government, there are more chances of them going bankrupt.

4. Foreign bonds are difficult to buy, and is mostly done as a part of a mutual fund. However, investing in them can turn out to be risky.

To conclude, even though certain bonds may be risky, or offer a lower rate of interest, buying bonds are a safe option, as they are sound investments.

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Investing In Bankrupt Companies

Sometimes bankrupt companies can be a good choice for an investor. The key is not to buy their stock while in bankruptcy, but rather to wait until their new stock is issued. A bankrupt company issues stock to raise money to pay back some of their debt. Often the biggest beneficiaries are their old creditors.

Large investors are paid back with large quantities of the company's new stock, but are reluctant to hold it due to their previous experience. They often sell it very quickly, driving down the value of the stock to below what it should be. This creates an opportunity for a small investor to pick those shares at a bargain price.

This is generally best done with companies that have a small market-cap. This is because bankruptcies create a kind of investor feeding frenzy where so called "vulture investors" do their best to acquire the company's remaining assets. A company that has been fed on may not be a good long term investment, and its low share price may be appropriate. Small cap companies represent less appetizing meals.

The key, as always, is due diligence in researching the companies remaining fundamental assets. Determine whether the company suffered a single catastrophic event that drove it into bankruptcy, or was fundamentally flawed and rotted from the inside. Find out if the problem that drove it into bankruptcy still exists, or the situation may repeat itself. Consider all of these things when deciding if their new stock is right for you.

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Mutual Funds

A mutual fund is perhaps one of the most popular means of long term investing and is the vehicle of choice in IRAs and 401k accounts. A mutual fund is basically a way of investing in a pool of different companies in order to minimize risk.

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