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Bond Investing

Issuing a Bond is another method by which companies and/or government institutions can raise money to fund their day-to-day operations or to finance a specific project. As opposed to a stock in which an investor buys ownership shares of a company, when an investor buys a bond, they are lending their money to the borrower (typically a corporation or government institution) for a certain period of time. They are not taking ownership. In return, the bond holder gets paid interest payments from the company or government institution for the stated term and they typically get their principal loan amount back at the end of the stated term. The following are some items to consider when investing in bonds:

You Can Lose Money In Bond Investing

Investors can lose money in bonds. As with any lender and borrower relationship, the borrower can default on their obligations. A company or a government institution can have financial difficulties that could affect its ability to pay the agreed upon interest rate or even worse, to pay back the investor’s principal.

Bond Prices Move in the Opposite Direction of Interest Rates

When interest rates fall, bond prices rise and vice versa. If you hold a bond until maturity (when the term ends), these price fluctuations may not matter as the borrower is required to pay you back your principal by the end of that term. However, investors who do not want to wait until maturity could have their principal affected by these price fluctuations.

A Bond and a Bond Mutual Fund are Different Animals

With a bond, you get your interest payment plus your principal back at maturity, assuming the borrower does not default. With a bond fund, your returns are not as certain as the fund could be buying and selling bonds on a regular basis and thus the return is uncertain because the fund value is fluctuating.

Understand the Term of Your Utah Bonds

Investors should understand the term associated with the bond. With a 10 year bond, for example, the principal loan amount is not usually due to be paid back to the investor for 10 years. Although the longer term might provide a higher interest payment to an investor, in periods of inflation or rising interest rates, investors’ principal value could be eroded by rising interest rates and inflation. That is not to say that long term bonds are not a good decision as in periods of decreasing interest rates, this can be a good decision. The important thing is to consider the length of the term on the bond and understand the potential benefits and risks of investing in a particular bond.

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2018-03-14T17:44:29+00:00