Investing in Bonds
Bonds, sometimes referred to as “fixed-income securities,” are prized chiefly for the regular income they can generate. They are often added to a stock portfolio as a way to reduce risk, because bonds sometimes post gains when stocks are suffering. But that doesn’t mean bonds are risk-free.
Bond prices and yields move in opposite directions. Result: Prices can tumble if interest rates climb. The longer a bond has until it matures, the more vulnerable it can be to rising rates. That means that, if you sell a bond before maturity, you may receive substantially less than the bond’s principal value. Bond investors can also be hurt by inflation or if a bond’s issuer defaults on interest payments. Defaults are potentially an issue with all bonds, but they’re a particular worry with corporate bonds, so it’s important to pay close attention to the financial strength of a bond’s issuer. Even a fall in interest rates can hurt. While that fall in rates might boost the price of existing bonds, it also means you will earn a lower yield if you reinvest your interest payments or the proceeds from a maturing bond. Checkout how the the pros and cons of these 5 bonds and how they can be beneficial to you:
1. Treasury Bonds: U.S. Treasuries are considered among the safest investments because they are backed by the “full faith and credit” of the U.S. government. They come in three versions: Treasury bills, which mature in 90 days to one year; Treasury notes, which mature in two to ten years; and Treasury bonds, which have maturities of up to 30 years. While the regular interest payments from Treasuries are considered quite secure, the value of these bonds can fall sharply when interest rates rise. The bonds also carry inflation risk: You could lose money in inflation-adjusted terms if, say, consumer-price increases outpace the interest rate on your bonds. Worried about that risk? You might talk to a financial professional about inflation-indexed Treasury bonds.
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