Are Bonds Right For You?
Bonds may appear to be dull, but they are not. They are also not a wonderful shelter for wealthy, retired people who never wish to lose money. They play a role in your financial strategy. Bonds can assist you with risk management, diversifying your investment portfolio, and saving for short and long-term goals.
What Are They?
Bonds and other credit instruments, such as notes, bills, and commercial paper, are IOUs receipts for money borrowed from the investor. They bind the issuing organization to pay a specific amount of interest regularly (typically semiannually) and repay the whole face amount on the maturity date, which is specified when the bond is issued.
What's The Cost?
Bonds typically have a face value of $1,000 or $5,000. Some have larger denominations, but very few have lesser denominations. You can purchase them through a broker or, in the case of US Treasury bonds, directly from the government.
Do They Pay Out Monthly?
Most bonds pay interest twice a year. Many bond-investing mutual funds and unit trusts provide monthly dividends.
What's Bond Maturity?
Bonds pay back their face value when they reach maturity. Bonds maturing in two years or less are referred to as short-term bonds; debts maturing in up to ten years are referred to as intermediate bonds; and bonds maturing in ten years or more are referred to as long-term bonds.
Are They Taxed?
Interest and capital gains on corporate credit instruments are typically taxed at the federal, state, and municipal levels. Income from Treasury and agency securities is taxed at the federal level, but all Treasury and some agency securities are tax-free at the state and municipal levels.
