Should I Invest in Bonds

You invest your money in stocks and bonds or lend money to someone else. All of these ways and others are different types of investments. You invest in order to make money. You can make money through earning interest, capital gains, or dividends which are essentially a part of the companies income.

Bonds are one of the most common types of a investments. Bonds are issued by corporations and governments. They are issued in order to get money for growing a business or running a government. A bond is a loan.

Bonds are usually issued in $1,000 increments. You can buy one bond for $1,000. The government also issues lower denominations such as $50 savings bonds which you are probably most familiar with. You might even have a few savings bonds that you have received over the years as gifts.

When you buy a bond, you have a few different ways to earn money. The first way is the most obvious way which would be by earning interest. If you buy $10,000 in bonds at a 4% interest rates, you will get $400 a year. Sometimes you may be paid annually, semiannually, or all at once when the bond is repaid.

You can also make money when paying a discount. If you pay a premium for a bond, meaning for a $1,000 bond you pay more such as $1,050, you are making less, but this happens more often with a bond that has a higher rate. A discount would mean you pay less such as paying $960 for a $1,000 bond.

Bonds can also be traded for profit. If you buy a bond that doesn’t mature for 10 years, you could sell them after 5 years. If you buy a $1,000 bond for $960 you can sell it after a year collecting interest for $1,000 and make a $40 profit in addition to what you made in interest those two years.

Here is a bond example. Let’s say a corporation is selling $1,000 bonds and you want to buy 5. They are selling for $980 each at an interest rate of 5%, and they mature in 5 years. You buy 5 bonds and pay $4,900 with a $5,000 face value. Each year you make $250 and in year five you make $250 plus you are repaid $5,000. You make a total of $1,350 which includes $1,250 for five years of interest plus $100 from the discount rate you bought it at.

You could sell them before maturity and trade them, or you can just wait until they mature and collect the principle back. If you are young, don’t invest too much money with bonds, focus more on stocks because you will make more money.