Why Invest in Bonds?

Bonds are very similar to bank loan. Investing in bonds means that you are loaning your money to a corporation or government. Bonds are debt, whereas stocks are equity. If you buy stocks, you will become an owner in a corporation.

Investors can choose to invest in short, medium or long term bonds. Longer-term bonds (with maturities of 10 years or more) tend to pay higher interest rates because they have greater risk than short-term bonds (with maturities of less than four years).

Why invest in bonds? There are many benefits to buying bonds, such as the follows:

1) Investing in bonds is safer than other types of investment like stocks and shares.

2) Bonds have higher and guaranteed rate of return, with fixed interest payments.

3) Most bonds issued by governments (state or local) are exempt from federal income taxes.

4) Bond portfolios can provide stability of principal value.

5) Another advantage is that they are subject to rating systems. A bond rated 'AAA', which is the highest grade, is likely to be repaid on time and in full.

6) Bonds are very liquid and easy to sell.

* Related Article: Advantages of Convertible Bond Issue