1. Throughout this semester and from what we have learned in the units I have
become very interested in bonds. On page 82 of our text bonds are defined as
“marketable securities that represent a loan to a company, a municipality, the
federal government, or a foreign government with the expectation that the loan will
be paid back at a set date in the future.” Something that really interests me about
bonds is the interest. Interest on a bond can be in the form of periodic payments
throughout the bonds lifetime or it can be single payments at maturity. Considering
bonds are less risky than stocks the return is not as high but for me that is okay.
Considering I am just now starting to learn all about investing I am actually looking
for an option that is not too risky. Bonds are known for a higher return than CDs
and savings account so I think this would be a good middle ground. On page 84 of
our text it also talks about how having bonds can stabilize a portfolio.
Disadvantages to having a bond include credit risk, interest rate risk, and
income risk. Credit risk is known as the “risk of default by company” which would
cause one to lose their principal investment. Interest rate risk becomes very
important if one is looking to sell their bond. On page 86 of our text it states
“essentially, the risk is that you will be stuck holding a long term bond that pays less
than the current interest rate, making it hard to sell and reinvest your capital.”
Lastly, income risk is dealing with selling your bond and inflation potentially being
higher than the rate of income you are receiving. A tip our text gives us to manage
income risk is to stagger or ladder bonds so that you can pick the higher interest
rates along the way.
In order to reduce taxes and cost related to bonds you can buy shorter
maturities and roll them over. One thing to remember is that some bonds, such as
U.S. Treasury bonds, you are not required to pay any state or local income tax.
Personally I feel that these special tax benefits are a huge plus to bonds. Our text
also states on page 85 that municipal bonds tend to not be subject to federal income
tax. Again, with bonds you must understand you won’t see as high of a return as you
could expect with stocks. However, considering I have had a bank savings account I
truly think this is a great next step for me and my current financial needs.
Cagan, Michele. The Everything Investing Book Smart Strategies
to Secure Your Financial Future! 3rd ed. Avon, Mass.: Adams
Media, 2009. 82-86. Print.