Bonds: Theyre Not Just for Seniors 5.00 / 5 (100.00%) 1 vote

Bonds Theyre not just for seniors

Those approaching retirement age are often seeking low-risk investments for their retirement savings and frequently turn to bonds as a safer alternative to stocks. With the variety of bonds available and their potential for earnings, however, the bond market is getting more attention of late by all kinds of investors leading one to the conclusion that Bonds: Theyre not just for seniors.

Bonds are a type of IOU. Though they are sold to investors, they actually are a loan to a company or a governmental agency, which promises to pay a certain interest on the loan until the bond matures or comes due for repayment. Types of bonds available include U.S. Treasury bonds, corporate bonds, municipal bonds, asset and mortgage backed securities, and bonds from foreign governments.

Bond ratings come from accounting agencies that examine the borrowing organization to see how capable it is of repaying the loan. Bonds with low ratings and high risk may offer higher interest payments as a way of attracting buyers.

Though bonds overall tend to have a lower return than stocks, there are a variety of reasons for investors to include them in their investment portfolio. Diversification, for example, is a major motivator for bond investors. Since bonds are less volatile than the stock market, they can be used to protect and stabilize the value of a portfolio when the stock market is struggling.

Since bonds are considered stable investments, they are seen as better suited for individuals who know that they will be needing a sizable sum of money in the near future. Fluctuations in the price of the bond on the market will have little effect on the overall value of the investment because most of the return comes from the interest payments. So rather than risking the slings and arrows of investing in stocks, people who are saving up for college tuition or to buy a house often put their money in high-yield bonds where the risk of loss is minimal.

Bonds also are a source of consistent income. Coupon payments are made at regular intervals and may be seen by some as a better source of consistent income than dividends that are offered by some stocks. There also can be tax breaks related to bond income. Federal law exempts from taxes the payments from some types of bonds, such as municipal bonds. So those who already are in a higher tax bracket can realize a major tax savings on this type of investment.

Bonds often are referred to as fixed income investments, but they are not risk-free. There always is the possibility of default, where the bond issuer goes bankrupt or otherwise cannot pay on its loans. In this case, investors could lose the remaining value of their investment. Periods of high inflation could also eat into the value of the bond, since the interest payments are fixed at the time of the bond purchase.

Still, high-yield bonds are frequently sought after for their security, tax benefits, and ability to balance out an investment portfolio. So the are suitable for a variety of types of investors, not just retirees. So remember, Bonds: Theyre not just for seniors.