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The Pros and Cons of Bonds

What are bonds?

A bond is a loan given by an investor to the company. The investor is the lender and the company is the borrower. The price paid for the bond is called its face value. The money is returned by the company with interest on the maturity date.

Types of bonds

1. U.S. Government Bonds: These bonds are the safest as these are backed by the government. These include U.S. treasury bills, U.S. treasury notes and U.S. treasury bonds based on maturity period.
2. Municipal Bonds: These bonds have tax advantages and are issued by the state or local bodies.
3. Corporate Bonds: These are issued by companies.
4. Zero-coupon Bonds: These bonds do not make regular interest payments. Instead these are sold at a discount and the money is collected at maturity.

The pros of holding a bond

1. A bond guarantees payment of principal and interest.
2. Bonds provide regular income and are hence less volatile than stocks.
3. Government bonds offer a very high level of security.
4. Government bonds have tax advantages.
5. Convertible bonds can be converted to stock.
6. Agencies provide ratings to bonds that help us select the right investment.

The cons of holding a bond

1. One of the risks in holding a bond is that the loan might be called back early.
2. Inflation influences the real income from your long term investment in bonds.

These factors will help us make our decision on bond investment.

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