Investing In Bonds For A Secured Future
There may have been more than one occasion when you might have had to borrow money from a friend: at the coffee shop, in the office, or even for the cab service. When you run out of money, borrowing is usually your only way out. Juxtaposing the same with big corporations and the federal government, one would find it is not that easy for them. Not only have they to repay the money owed, but to top that amount with interest. That is why companies are made to sign a bond by law, promising the repayment of the money owed. It is a formal kind of security to ensure due payment.
However, certain criteria ought to be considered before investing in a bond. Let us take a short tour through how investing in a bond could benefit you.
Before Investing
The working of a bond primarily depends on whether you need to invest money for a long or short term. Besides, it also depends on your tax status, the period and investment goals. There are some basic strategies on hand, which should be considered before making any investments. For instance, putting all your assets and risks in one single asset class would not be a good idea. It is better to diversify the risks by creating a portfolio of several bonds within the bond. By choosing different issuer’s bonds, you could protect yourself from the possibility that one of the issuer’s may not be able to pay back the amount owed.
After Investing
After investing, a par value, or the amount of money the investor receives after maturity of the bond, is calculated. This means the amount (principal) owed should be returned to the investor. The coupon rate is the amount received by the bondholder as the percentage of the par value. Lastly, a maturity date is arrived at wherein the bond issuer needs to return the principal amount to the lender.
To arrive at how much a bond would yield, one could divide the amount of interest paid over the course of a year by the current price of the bond. Prices of bonds fluctuate; hence, the current price is always taken into consideration. However, if you decide to sell before the maturity date, it is advisable to do it at the current rate of the market.
Types of bonds
There are different types of bonds available. For example, government, corporate, agency, mortgage-backed securities, municipal, etc. In addition, different maturity level bonds are also available; these help in managing the interest rate risk.
The treasury bonds available from the US government have maturity dates ranging from 3 to 5 months to thirty years.
Corporate bonds, on the other hand, which are sold through public security markets, are a little risky and have high interest rates.
Local and state government bonds have higher interest rates, as unlike the federal government, there are more chances of them going bankrupt.
Foreign bonds are difficult to buy, and is mostly done as a part of a mutual fund. However, investing in them can turn out to be risky.
To conclude, even though certain bonds may be risky, or offer a lower rate of interest, buying bonds are a safe option, as they are sound investments. Securing a number of bonds gives the owner a good credit rating and helps to prove his or her financial stability.
Joseph Kenny
http://www.articlesbase.com/non-fiction-articles/investing-in-bonds-for-a-secured-future-76137.html
Comments
please help economic, bonds, cash flows, etc?
7. Debenture bonds are
a.bonds secured by specific assets of the issuing corporation
b.bonds that have a single maturity date
c.issued only by the federal government
d.issued on the general credit of the corporation and do not pledge specific assets as collateral.
8. The relationship of $225,000 to $125,000, expressed as a ratio, is
a.2.0 to 1
b.1.8 to 1
c.1.5 to 1
d.0.56 to 1
9. The ability of a business to pay its debts as they come due and to earn a reasonable amount of income is referred to as
a.solvency and leverage
b.solvency and profitability
c.solvency and liquidity
d.solvency and equity
10. Cash paid for equipment would be reported in the statement of cash flows in
a.the cash flows from operating activities section
b.the cash flows from financing activities section
c.the cash flows from investing activities section
d.a separate schedule
11. Which of the following should be deducted from net income in calculating net cash flow from operating activities using the indirect method?
a.a decrease in inventory
b.a decrease in accounts payable
c.preferred dividends declared and paid
d.a decrease in accounts receivable
12. Horizontal analysis is a technique for evaluating financial statement data
a.for one period of time.
b.over a period of time.
c.on a certain date.
d.as it may appear in the future.
13. A ten-year bond was issued at par for $150,000 cash. This transaction should be shown on a statement of cash flows under
a.investing activities
b.financing activities
c.noncash investing and financing activities
d.operating activities
14. Cash paid for preferred stock dividends should be shown on the statement of cash flows under
a.investing activities
b.financing activities
c.noncash investing and financing activities
d.operating activities
15. The current period statement of cash flows includes the flowing:
Cash balance at the beginning of the period$410,000
Cash provided by operating activities185,000
Cash used in investing activities43,000
Cash used in financing activities97,000
The cash balance at the end of the period is
a.$45,000
b.$735,000
c.$455,000
d.$85,000
8. The relationship of $225,000 to $125,000, expressed as a ratio, is
b.1.8 to 1
9. The ability of a business to pay its debts as they come due and to earn a reasonable amount of income is referred to as
b.solvency and profitability
10. C, 11. B, 13. B, 14. Either D or B. I think it’s B…
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