Know Your Bonds

By | August 21, 2013

Do you know what bonds that you have got? Do you know the term, and are your bonds risk free?

These are just some of the questions you should know the answers too if you have any bonds. A bond is a security that you have given a company; you have lent them money with an agreed term and agreed interest repayment at the end. If anything happens to that company you will not owe any part of a company like if you own shares. You are in fact a creditor, and they just owe you the bond value plus interest.

Risk

As with any investment there is a degree of risk involved and this can be the amount of money that you make from the investment and it is possible to lose the money of the bond completely, although this can be quite rare.

The safest bond is a government bond or it is sometimes called a Treasury bond. These are considered to be the safest and most risk free due to the guarantee that you get from the government. They will also mean that they have one of the lowest interest rates available. This is normally the case with the most secure option, the lowest return for your money.

Fixed rate

You can get bonds from different places and the most common place that you can find bonds at the moment are banks, they will tend to have offers on where you can invest money for a set amount of time and they normally come with a fixed rate of interest at the end of the term. The terms can vary from one to around five years. The risk you take with these bonds is from the amount of interest that you will potentially earn. When you take out the bond and the rates are low, you are taking a risk that the interest rates won’t increase over the period of time. If they rise you will have potentially lost money on your bond in interest that you could have earned. It will mean that if you had invested for a shorter period you could have re-invested and made your money work harder for you.

Terms

There are different lengths of terms that you can invest in bonds and these will vary as to what you are looking for. The longer term bonds will normally pay an interest payment at least yearly, the short term bonds normally pay on maturity of the bond.

The usual length of bonds:

  • Short term bonds, these will last approximately between 1 and 5 years.
  • Medium term bonds, these will last anywhere from 6 and 12 years. You would expect to receive some form of payments with this length bond, this is typically a monthly payment or an annual payment, check with your tax office you might need to declare these payments and you could end up paying tax on them.
  • Long term bonds, anything over the 12 years. These aren’t as common but they do exist.

 

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