September 19th, 2010 | 
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Investing in bonds can be a very safe way to invest your money. The returns generated from bonds tend to be very good at most times, and this should be considered by the investor as a way of diversifying his/her investment portfolio.
There are four basic types of bonds. They are sold through the Federal government, through large corporations, State and local governments, and foreign governments. This article will give a brief description of each of them.
The best thing about federal government bonds over other types of investments is that you will get your initial investment back. This makes bonds a very attractive investment for people initially starting out with investing, as you will at least get your initial money back instead of losing everything. If you are the type of person who has a low tolerance to risk or is highly risk-averse, you should learn as much as you can about bonds as an investment vehicle!
The US government sells Treasury Bonds through the federal Treasury Department. The bonds you buy can have a maturity date of between 3 months and 30 years, which is plenty of choice! The types of Treasury bonds include Treasury Bills (aka T-Bills), Treasury Notes (aka T-Notes) as well as your normal Treasury bonds. The good thing about these types of bonds is that they are all backed by the Federal US government. Tax is charged only on the interest accrued by the bond over its life.
Corporate bonds differ from Government bonds in that they are only sold through the public securities markets. When you buy a corporate bond, you are essentially being sold part of the company’s debt (or an “IOU” if you will). Because of this increased risk of the company going bankrupt, higher interest rates are charged to offset this risk. The only thing that can worry you is if the company goes bankrupt. If this happens, the bonds are essentially worthless. However, the payoffs can be greater than a government bond.
State and local governments will also issue bonds as well. Unlike the Federal government bonds, these types of bonds will have a higher interest rate attached to them, which means more money for the investor. However, like the corporate bonds, these have a risk of becoming worthless, as states and local governments can become effectively bankrupt and are not secured by the Federal government like Federal bonds are. So why would you invest in these types of bonds? These types of bonds are essentially free from income tax, and this includes the interest charged on them. Depending on where you buy them, these bonds may also be exempt from state and local taxes as well. The most common kind of these bonds are Tax-Free Municipal Bonds.
The last type of bond is the foreign bond. These tend to be difficult for the individual investor to purchase directly. However, if you feel these are worth the effort, you will find various mutual funds will invest in these. However, you must be warned! Bonds issued by foreign governments may not be secured by them like the Treasury bonds in the US. With the current global financial crisis, many foreign governments are feeling the pinch! Even though the payoff may greater, the risk is also greater. It would be advised to invest purely in US Treasury bonds as they are at least backed up to get your initial investment back. Although the interest may be a bit lower, there is very little, if any, risk to the investor. When the bond reaches maturity, the best thing you can do is to take the money and reinvest in another bond.
Investing in bonds can be highly profitable with very low risk. With the current sharemarket volatility being experienced around the world, investing in bonds can help you weather the storm by providing a safe and reliable investment if done correctly. It can also give you piece of mind to sleep the night as well!
If you are interested in this type of investment, there are plenty of valuable sources of information online where you can learn more about how profits are made from bonds. Give it a try, and you may find that your investment portfolio increases in value faster than you would have imagined!
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