Bond Markets - Things to Consider Before You Take the Leap!

Bonds are another flexible category of financial instrument. Bonds are usually floated by companies. They can be purchased by anyone the only condition being an undertaking from the issuing company that they will repay the money borrowed by selling the bonds with interest on a specified date. Bonds may be sold by corporations and government.

What are Bonds and Why Should You Invest in Them?

Bonds are financial instruments that help large business houses and the state to rise finance on a large scale. In return the stakeholder gets interest periodically and the principal amount along with the interest accumulated on a specific date. Bonds were introduced by a king sometime back in the medieval age and now it is being used as an effective source of raising finance by companies and governments.

Your returns are assured in a bond unlike other financial instruments like shares or Offshore mutual funds. There are no risks involved while investing in a bond. They can be a means for regular income. If your investment portfolio is made of shares, bonds and other financial instruments the income from bonds can make good the loss created by others. On the contrary if there are profits from other investments the regular income from bonds will help you to make further investments or save money or for meeting other expenses as you wish.

Types of Bonds

Bonds are generally classified on the basis of the body/institution that issues them. Moreover the category of bonds may vary from country to country and from governments to governments. Another way of classifying them is on the basis of maturity period. Another way of classifying them is on the basis of tax exemptions that they are entitled to.

Some of the different types of bonds are as follows:

Municipal Bonds

Municipal bonds are also known as munis. They denote the bonds issued by municipal corporations in the locality. The holder of this bond is entitled to claim federal tax exemption. They funds raised from these bonds are used to finance local projects. Municipal bonds are not risk free though the fact remains that the risks involved are less.

Corporate Bonds

Corporate bonds are issued by companies. The objective is to enable them to meet the high cost that they have to incur for big projects. However these bonds are very risky no matter whether they are issued by a reputed company or not and hence the interest rates are usually high. There are two more categories for classifying these corporate bonds. In one case the company allows you to convert these bonds into shares whereas in the other the company repays the bond value at a reduced price if there is a fall in the interest rates and if it is before the maturity date.

Government Bonds

Government bonds are issued by the concerned governments. They are absolutely risk free. Another advantage of government bond is that they help you to claim lots of tax exemptions. The money raised from these bonds is used to finance large projects undertaken by the government in various parts of the country for welfare activities to people in the state.

Saving Bond

Savings bonds are also issued by the government. Unlike other bonds the issuer or the purchaser cannot convert them into shares if he is investing in savings bonds. While he is investing in savings bonds there is no possibility of settling the equivalent money value of the bond before the maturity date. The buyer gets lot of tax exemptions by investing in saving bonds. These bonds also offer lot of tax benefits to the buyer. Similarly there is no secondary market for these saving bonds meaning that you cannot sell it to others except the issuer unlike other type of bonds. They are also equally safe like the government bonds.

Continue to: Factors to Determine before Investing in Bonds