There are numerous investment options that are available to an investor such as stocks, bonds, precious metals and stones etc. Bonds are a good investing option for those who want to invest in a low-risk instrument. They are basically instruments of debt security. When someone purchases a bond, he basically lends money to the entity issuing the bond for a specified period of time. In return for this, the entity pledges to pay interest to the lender on a pre-decided rate of interest till the time specified after which the borrowed money (principal) is returned to the investor. The biggest advantage is that bonds provide capital protection i.e. the money that is invested will be returned in full.
There are different types of bonds which are basically categorized by the type of entity that has issued them. Some of the best bonds available in the US are:
• US Government bonds – as the name suggests, these are issued by the US government. These are considered to be extremely safe as the government can print more money to repay them. Thus the risk of default in these is very low. They are usually AAA rated and the interest given is tax-exempted thus making it a very attractive option. Since this type of bond provides so many benefits, the rate of interest that it gives is pretty low as compared to the other bonds.
• Municipal bonds – again as the name signifies, these are issued by the state and municipal governments. These are also very safe although not as safe as the governments bonds as the states can’t print money. They are also tax-exempt just like the other bonds. The rate of interest provided in these is a little higher than the government bonds as they carry a little more risk. The municipal bonds with AA and above ratings are pretty safe so are a very good option to get into.
• Corporate bonds: are issued by various companies in order to raise capital. They usually are considered to be risky as they are not backed by government and as has been seen occasionally, many companies get liquidated. Since the risks on these bonds are high, they provide higher rates of returns as compared to the other types of bonds. So if one is willing to take the risk, corporate bonds are good sources of income although one should take care to invest in bonds which are rated AA or higher.
Bonds remain a necessary part of any portfolio of a well diversified investor. Although bonds in general are considered to be low-risk/low-return, we have seen that even these have various levels of risks and returns. Thus any investor should always consider the fact that higher returns mean higher risk and therefore should go for a bond that suits their risk appetite.