When it comes to investing, some choose to utilize bonds. Bonds are debt securities issued from companies or entities in order to make money and, in general, present a lower risk compared to traditional stock investments. Here are some key insights about bonds that are important to know.
When you buy bonds, in general, you’re giving the issuer of the bond a set amount of money for a fixed period of time. The issuer pays you interest at a specified rate until the bond matures. When a bond reaches full maturity, or when that specified time is over, the principal is paid back to you in full. In general, most bonds have the option to collect interest as stated above. However, one type of bond, zero coupon bonds, don’t pay regular interest, but are purchased at a price lower than their value. In short, the two ways to make money from bonds are to: buy bonds at a lower price then sell them higher, or hold onto bonds until they mature and collect regular interest payments.1
Types of Bonds2
Bonds come in a few different categories.
Treasury Bonds are issued by the government to pay for budget deficits. Because they’re backed by the government they’re generally considered low-risk but don’t often yield the highest return. Typically the interest is exempt from state income taxes. There are also a few other types of government-backed bonds.
Corporate Bonds are typically issued by companies that need money to pay for more research of big projects. The interest received from corporate bonds is taxable by both federal and state.
Municipal Bonds are issued by states and local governments, typically to finance public projects or services. If you buy a bond issued by your home state you may be able to avoid state and local taxes on it.
These three categories are in general, most common, but there are also a few other categories including mortgage-backed bonds and foreign bonds.
Do Your Research
One of the most crucial directions to follow before investing in bonds is to know the issuer of the bond. It’s the issuer who is paying you back and you want to make sure that they can. Do your research on the issuer beforehand to see which is the best fit for you.
As with any part of personal finance, it’s important to speak to a financial professional before making changes to your investment portfolio. Bonds can be a great way for some to enjoy the benefits of investing. Before investing make sure to understand how bonds work, know what type will work best for you and do your research on the issuer. Our team at Miramontes Capital can help you decide what will work best for you.
1 “How to Invest In Bonds: A Step-by-Step Guide.” The Motley Fool.
2 “Types of Bonds: 7 Bond Types Explained.” The Street.
FOR MORE INFORMATION REGARDING INVESTING IN BONDS CONTACT MIRAMONTES CAPITAL.
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