Whenever financial security is mentioned, what comes into the minds of most individuals is an investment because we all know that Investment is the key to securing you with a long-lasting stream of income. There are various ways to invest to boost your financial capacity and Bond Investment is one of them. Over time, Bond Investment has paid and is still paying off for thousands of investors.
A bond is a long-term investment plan or contract between a lender and a borrower, whereby the borrower agrees to pay the lender interest and repay the principal at stipulated periods. A fixed-income instrument shows a loan given by an investor or lender to a borrower. This borrower is usually a corporation, municipality, state, or even the federal government (in terms of FGN bonds), while the lender/investor is often an individual investor.
Investing in bonds is a safe investment that can spawn a steady stream of income as an investor, regardless of how unsteady the stock market becomes.
Types of bond investments
There are several types of bonds that different investors invest in, some are:
Treasury Bonds: This is the safest bond to invest in because it is issued by the Federal Government, however, regardless of how safe it might be, treasury bonds generate the lowest yields/returns when compared with other bonds. Hence you can conclude that the safer it is, the lesser it yields.
Municipal Bonds: This bond is issued by the State and Local governments to finance capital expenditures and projects such as; the building of schools, the construction of bridges, the building of hospitals
Corporate Bonds: This type of bond is issued by Corporations, Companies, or Organizations that need capital to increase or enlarge their businesses.
Asset-Backed Securities: This is a different kind of bond that has the backing of financial assets. In other words, it involves the putting together of valid financial assets by a potential borrower and then selling them to interested investors.
Other classifications of bonds include fixed-rate bonds, floating-rate bonds, zero-coupon bonds, convertible bonds, and inflation-linked bonds.
Factors that affect Bond Price
- The credit status of the issuer
- The forces of demand & supply of such securities
- The inflation and interest rate movements
- Activities and performances of the equities market
Reasons to Invest in Bonds
1. Liquidity: Bonds are often liquid, which means that it is easy to purchase in large quantities at a convenient price. On the other hand, it is often fairly easy for an institution to sell a large number of bonds without affecting the price much, which may be more difficult for other securities. In effect, bonds are attractive because of the comparative certainty of a fixed interest payment twice a year and a fixed lump sum at maturity.
2. Legal Protection: Unlike some financial securities, if you are a bondholder, you will also enjoy a considerable amount of legal protection that comes with being a bondholder against uncertainties. This means that even if a company goes bankrupt, you may be entitled to compensation that allows you to receive some money back (the recovery amount), whereas the company’s equity stock often ends up valueless.
These clauses specify the rights of bondholders and the duties of issuers, such as actions that the issuer is obligated to perform or is prohibited from performing.
3. Volatility: The volatility of bonds (especially short and medium-dates) is lower than that of equities (stocks). Thus, bonds are generally viewed as safer investments than stocks. In addition, bonds do suffer from less day-to-day volatility than stocks, and the interest payments of bonds are sometimes higher than the general level of dividend payments.
In conclusion, the benefits you obtain from investing in bonds outweight of other securities, therefore, it is one of the best decisions to make. To be on the winning side, opt for a bond investment as it is one of the safest investments today.
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