Bonds are debt security comparable to an IOU. Borrowers issue them to raise money from investors willing to lend cash for a specific time. When you buy bonds, it is a loan to the issuer. That may be a corporation, municipality, or the Government. Governments sell them for funding highways, schools, hospitals, and other pursuits and as a revenue supplement from taxes. Corporations sell them to finance their operations, projects, and investments. 

Bonds & Interest

During the bond’s life, the issuer repays a specific interest rate. When the bond matures, they pay the principal, face value, or par value. It is a “coupon payment” made twice a year to investors. When investors get paid regular interest, they are known as “fixed-income investments.” These payments help offset money losses with stocks. Bonds are less volatile than stock investments, adding reliable income and stability to an investment portfolio.

It’s essential to research inflation rates before purchasing. Rising inflation and interest rates are significant risks that lead to falling prices, and ultimately, your bond will lose its value. Credit scores show lenders their creditworthiness and ability to pay back debts. Certain bonds have credit ratings that assure investors they’ll get their investments repaid. On the S&P rating model, the highest rating is AAA. Any bond with a ‘C’ rating or lower is considered a high-risk liable to default, and investors will take a loss.

Bond types

• Municipal: Debt securities issued by the states, cities, counties, and other government entities. They include:
• General obligation bonds: Not secured by assets and backed by full faith and the issuer’s credit. Furthermore, they have the power to tax residents to pay bondholders.
• Revenue bonds: Backed by revenues from specific sources or projects.
• Conduit Bonds: Government-issued munis for private and non-profit entities like hospitals or colleges. The “conduit” borrower agrees to repay the issuer, and the issuer pays the principal and interest. If conduit borrowers can’t meet payments, however, the issuer is not required to pay the bondholder.
• Investment Grade: These bonds have a higher credit rating than high-yield corporate bonds, meaning less credit risk.
• High Yield: They have lower credit ratings and higher credit risk. Therefore, they offer higher interest rates in return for the increased risk.

To learn more about different Bond types, contact DNS Insurance Broker for the best available options.