What are bonds? Definition, Types, Advantages, and Disadvantages

An investment tool generating a flow of stable income through saving capital. Several persons, companies, and governments have utilized them for financing their respective activities. Well, if there is a moment when you plan to diversify your investment portfolio, then reading about bonds shall be indispensable to you. We shall be looking at what bonds are, its types, the advantages and disadvantages, and more, to best guide you about your investments. What Are Bonds? A bond is a type of loan that arises from an investor to a government, corporation, or any other entity. The man who purchases a bond lends his money to the issuer of the bond. Then the issuer will pay him regular interest payments, which are more often called \"coupon payments.\" The issuer pays to the investor his principal amount at the end maturity. How Bonds Work? An organization or government will float its bonds, fixing the interest rate and maturity date. The investors then receive a fixed rate of interest till maturity date, by which the time the bond matures and the initial investment made to them is returned. For example, when an investor invests in a $5,000 bond bearing 4 percent annual interest payable after 10 years, he earns an interest of $200 every year. He also gets his principal back after expiration after 10 years as $5,000. Types of Bonds There are so many bonds that suit every financial need or risk consideration. Here are some of the most common ones: 1. Government Bonds Governments increase taxes to meet the cost for public services, infrastructural development investments, and others. Other safe investments by the government include government bonds. Among these, some are; Treasury Bonds (T-Bonds). These are long term debt instruments by the US government. They are more than 10 years in their maturity. Treasury Notes (T-Notes). This is a medium term instrument whose length falls between 2 and 10 years. • Treasury Bills (T-Bills): It has a short term ranging from one year or lesser. 2. Municipal Bonds Munis are municipal bonds or bonds issued to finance the state and locality public development works, such as water treatment facilities and schools and other local highways. Munis are available in two types: • General Obligation: Drowns in taxes and other taxes raised from pockets of a taxpayer which is being used to retirement and interest; • Revenue Bond : This pays using funds developed by that programs, examples; turnpikes. • Majority of municipal bonds provide tax-free interest earnings and therefore have high appeal towards taxpayers with a high bracket income tax. 3.Corporate Bonds The corporation needs finance for business development, research, and working capital. As a general rule, they are riskier than government bonds since the quoted rate of interest is too high. There are two types as described below: • Investment Grade Bonds: from firms with sound liquidity, which carries minor risk. 4. Convertible Bonds: Convertible bonds permit an investo