There are numerous assets that individuals invest in as part of their portfolio. A few of the most common asset classes are stocks, exchange traded funds, mutual funds, options, commodities, real estate, and bonds. We are often asked about bond investing and what factors impact the decision on buying this asset class.
So, what is a bond? A bond is simply a debt security used by companies or government entities to borrow money. In layman’s terms, it is a promise to pay back the initial investment plus a rate of return over a known period in exchange for borrowing money. The rate of return that the entity promises to pay is dependent on several factors. While not all inclusive, these factors include the financial strength of the entity, the length of time before the investment and interest is repaid, the frequency of interest payments, the credit rating of the entity, the type of bond issued, and the index used as the base rate.
One of the main risks to consider when investing in bonds is the general direction of interest rates. A simple rule to remember is that interest rates and bond values are inversely related (which means that as interest rates rise, bond values fall). The opposite applies as well when rates fall, as investors will see bond values rise. Either way, an investor must remember that they are investing in an expected income stream (the interest payments) which will be viewed differently when interest rates are volatile. An investor that is investing for the long term has a different consideration than one that is short-term trading and doesn’t plan to hold the bond until maturity.
If you have questions about whether bonds are suitable for you, please contact us at SeraphimWealth.com/contact-us.