Vivian Ayako Mudavuda

Best Investment in 2025 Meta Description: Bonds. Types of bonds. Why invest in bonds? The risks of investing in bonds. Did you know bonds may provide a steady stream of investment income, and play an important role in potentially lowering your overall portfolio risks? A bond is a debt security issued by the bond issuer for purchase by the bondholder. When you invest in a bond, you lend money to the issuer. In return, you are entitled to receive interest payments at scheduled intervals; and capital repayment of your initial principal amount at an agreed date in the future. An-image-of-bonds How do Bonds Work? Individual investors lend money to organizations by purchasing their bonds. The bond issuer issues bonds and pays periodic interest and repayment to investors. Here are some of the bond issuers and their funding needs. Corporations 1. Cash for operating expenses 2. Capital for growth and expansion 3. Funds for corporate acquisitions Government Treasury 1. Cash for budgeted national expenditure 2. Funds for repayment of national debt States, Cities, Townships 1. Cash for operating expenses 2. Funds to build public infrastructure Types of Bonds Bonds are differentiated by their varying payment features. 1. Fixed-rate bond: The interest rates are fixed throughout the term. 2. Floating-rate bond: The interest rate is reset at each payment date according to a predetermined interest rate index. 3. Subordinated bond: Has a lower repayment priority than other bonds issued by the same issuer in the event of the liquidation or bankruptcy of the issuer. 4. Convertible bond: Allows the bondholder or issuer to convert them into shares of common stocks in the issuing corporation at a pre-determined price in the future when certain conversion criteria are fulfilled. 5. TIPS (Treasury Inflation-Protected Securities): These bonds peg their principal amount to the inflation index, protecting the bondholder against inflation. 6. Zero-coupon bond: This is commonly known as a discount bond. The bond is bought at a price lower than its face value, and the face value is repaid at maturity. Why Invest in Bonds? It has a higher return than bank deposits. Regular income. Hedge against inflation Capital appreciation What are the Risks that come with Bonds? 1. Credit or Default risk: The bond issuer or borrower can’t meet the principal payment on any outstanding bonds. 2. Interest rate risk: If the interest rates rise, the price of your bond will tend to fall and vice versa. Note that the longer the time of maturity of a bond, the greater the interest rate risk. 3. Foreign exchange risk: some bonds are denominated in a foreign currency, which may fluctuate against your home currency. The impact of foreign exchange movements may offset any interest you may receive from the bond investment. 4. Liquidity risk: The risk of selling a bond at discounted prices due to the lack of a ready market or buyer. When a low credit rating the liquidity risk will be higher. 5. Event risk: Events such as leveraged buyouts and mergers may adversely affect the bond issue’s ability to make payments on the bond and the price of the bond. 6. Sovereign risk: The payment of the bond may be affected by the political and economic events in the place of the issuer. Having the right foundation in financial literacy should empower you to cultivate a successful investment portfolio. Understanding bonds is part of our financial education series enlightening you on investing as you tend your financial garden. Vivian-Writes.