Bond is a type of financial security that can be issues by private as well as public sectors. These bonds can be redeemed after maturity and most of them carry a rate of interest. These interests are payable when these bonds are redeemed. The incomes from the bonds is non-taxable and thus it is a great idea of investment if you want to get rid of the tax burden.
But many people ask – how can they invest in a bond? The answer is very simple.
How to invest in bonds?
The bonds that are issued especially by the public sectors (Government) have much lower risk to fail redemption than the other types of financial investments i.e. shares and stocks. But for this safety, you have to pay a price. You will receive much lower rate of interest than other modes of investments. You must follow the bond ratings to know about the dependability of these bonds. Bond ratings can be a bit confusing to understand but if you realized which bond has the highest rating, then you have definitely managed to know how you can invest in bonds. Some of the common ratings of bonds are – Aaa, Aa, A, Baa, Ba, Caa, Ca and C (highest to lowest).
Which type of bond is best for investment?
Sovereign bond is one of the types of bonds that is allotted in a foreign currency. So, one whose economy is quite stable financially must invest in those currencies. This is because due to the inflationary pressure, you have a chance to lose the capital amount during redemption.
If you are still asking yourself about how you can invest in bonds properly, then here is one guideline for you. You must invest in those companies that have low risks, preferably the multinational companies. On the other hand, the junk bonds are those bonds with higher level of risks. One thing that you must know is that unlike other share prices, bond prices do not fluctuate. So, you must keep a close watch on the bonds for understanding the movements in the bond market.
When to invest on bonds?
Bonds play a very crucial role to control the money supply in the market. So, buying bonds when there is an economical cash crisis is one of the stupidest things that you can ever do. This is because at that point of crisis, investors actually sell their bonds for satisfying their demand of money. Hence, there will be a huge supply of bonds in the market which will eventually lead to the fall of bond prices. So, you will lose on your own investment.
The prices of some bonds fall below the par. Investing in such bonds can definitely result into better and higher yield than that of those bonds whose prices are at the par. This tactic works better when the maturity date of that specific bond comes nearer.
So, it is quite clear now that how you can invest in the bonds. But one thing you must know about bond market is that the interest rate and price have an inverse relationship here. If one bond is issued for $1000 at the rate of interest = 6%, then the bond will yield $60 per Annum. Even if the new rate of interest is 8%, the old bond will still yield $60. But a new bond in the market will provide you with $80 instead. In order to understand this in a better way, you will need to know and understand the value of money at present in this economy.