How to Invest in Bonds?

Diversifying investments on your personal financial planning can cover the unexpected market movements. Both bonds and the stock market are the best options. Bonds can help balance your investment portfolio, especially in times of market volatility. Historically, a diversified portfolio provides profits with less risk than a portfolio with investments only in stock market. But before you bet on bonds, one must know what they are and how they operate.

How it work?

When you buy a bond, you are giving loan to the issuer. This issuer, who can be a company or the government, agrees to repay the loan with interest, within a given period of time.

The types of bonds offered are:

- Federal bonds. Are those issued by the State are mainly used to finance public debt and for government programs.

- State and municipal bonds, which are used to help finance roads, schools, hospitals, etc. projects.

- Bonds of public and private, that used to finance growth.

Interests and performance

The bonds pay interest a percentage set by the issuer. Typically, the issuer agrees to pay interest at regular intervals, i.e., quarterly or semiannually. The bond yield, which is the amount of money the investor receives for him, is calculated by dividing the annual amount earned on the price.

For example, a bonus $ 2000 paid a $ 120, has a yield of 6 percent (120 divided over 2000). The issuer typically reimburses the amount invested when the bond matures. Note that the bond price can fluctuate, that may influence performance, although the percentage of gain is the same.

Bond Maturity

The bond's maturity can reach 30 years issued. This implies that the bonus money expires and must be repaid. The zero coupon bond (Zero-coupon bond) is issued at a discount and returned at face value once you get to the amortization. For example, you could buy a bond discount of $ 600 and to return at maturity, $ 1200. All However, the refund amount at the time of maturity of the bond is not insured. Some investors prefer this type of bond because they can roughly estimate what their value.

Risk

Investments also can be diversified between bonds, as there are several types with different risk factors. Generally, high risks are those who are best dividends. The risk factors are:

- Upon the expiration of the bond. Here the bonus is subject to fluctuations in interest.
- Credit risk. The issuer may fail to pay the interest.
- Inflation risk. As in any investment, inflation can affect the interests of bonds.

Before the bond reaches its maturity, you can sell or buy at the market. If there is a change of ownership before its maturity, the price may fluctuate and that depends on the interests that time. When interest falls, the price of bonds rises and vice versa.

For example, you buy a bond $ 20,000 with interest at 5 percent. Five years later, another new bond similar costs $ 20,000, with interest at 6 percent. No buyer pays you $ 20,000 for a bond with an interest of 5 percent. Will have to offer a lower price than you paid in order to sell it. However, if the new bonds of $ 20000 offer an interest rate of 4 percent, you may sell your bond with 5 percent more money than you paid. Buyers usually pay more when interest is higher.

Learn how to invest in bonds, is something that a considerable number of individuals is raised to obtain shelter and to increase capital or absorb revenue amounts, while individuals examine the idea of how to save and secure the future of their children, as well education.

Be advised and informed properly, is a simple and safe way to succeed on our financial planning.

Happy investing :)

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