When You Purchase a Bond or Bond Funds; What Happens
Investing in bond funds or bonds are two different entities. When you purchase a bond, you are loaning your money to a corporation or to the government.
In exchange for loaning your money, you will receive the promise of regular interest payments. The bond will also be given a maturity date.
When the bond matures, you will be given your principal investment back. This will include several years’ worth of interest on that principal.
You can use a bond to live off the interest (although, in such a case, you would need to have invested quite a bit of money).
Alternatively, you could reinvest the interest, or use the bond for the purpose of balancing out a stock portfolio. This would work, because bonds are generally income investments, and stocks are generally growth investments.
Individual Bonds or Bond Funds as Income Investments
Income investments give you interest, and growth (or equity-stock) investments give you capital gains investment returns, if you have chosen your investments wisely. Therefore, usually when stock prices are up, bond prices are down, and vice versa.
This is one reason stock investors add bonds or bond funds to their portfolio. As the stocks go down the bonds go up and can balance out the portfolio’s bottom line.
Many people think that because bonds pay interest, they are 100% safe, because you can never lose your principal investment. This is not true!
The price of a bond (which is separate from the paid interest of a bond) can fluctuate. You can lose your principal if the price of your bond were to fluctuate to nothing (zero).
"There is an Important Difference Between Stocks and Bonds" -Lois
This is where bond ratings come in: there are high-yield bonds, and there are high-quality bonds. You must know the difference between the two, before you start to place your money into bonds.
Bond Ratings – Some Are Called “Junk”
The higher the interest rate of a bond, the lower that bond is rated— this is known as a high yield bond. The lower a bond is rated, the higher the interest will be that is paid on that bond.
This is why some financial advisors recommend that you buy short-term bonds, so that your bond can “mature” before its price decreases.
The highest-yielding bonds are usually the lowest-rated, high-yield bonds are called “junk bonds”. These are rated “C” by ratings services.
On the other hand, the lower the interest rate of a bond, the higher that bond is rated—this is known as a high-quality bond. High-quality bonds, which usually do not have high yields, are generally rated “A” or above by investment rating services, such as “Moodys”. There are several bond
RATING DEFINITION’S: S&P MOODY’S
Highest quality and grade. Prime. Maximum safety. AAA Aaa
Bonds which are judged to be of the best quality. They carry the smallest degree of investment risk. The obligor’s capacity to meet its financial commitment on the obligations is extremely strong.
High quality. High grade. AA Aa
Bonds which are judged to be of high quality by all standards and only differ in small degree to the highest graded bonds. The obligor’s capacity
to meet its financial commitment on the obligations is very strong.
Upper medium quality and grade. A A
Bonds which possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. They are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories. However, the obligor’s capacity to meet its financial commitment on the obligations
If you are an individual investor who is purchasing a bond, it is usually
best to stick with a bond that has a rating of “A” or better. (see the “Summary,” at the end of this article).
BONDS DIFFER, BASED MOSTLY UPON WHO ISSUES THEM:
- Government-issued bonds are called Treasury Bonds.
- Corporation-issued bonds are called Corporate Bonds.
- State- or Local-issued bonds are called Municipal Bonds, or “Muni’s,” for short; this type of bond is generally exempt from all state and
Individual Bonds Versus Bond Funds
Purchasing an individual bond can be an overly complex endeavor, and generally requires a large sum of money at hand. To fund even a single bond, you will often need at least $10,000 (but sometimes less).
Institutions, such as pension plans and insurance companies, will often purchase bonds. But they also have teams of people who can thoroughly analyze which bonds to buy, along with when it is best to buy—and sell—them.
Some Investors Use Bond Funds to Balance Their Portfolio -Lois
Individuals don’t have this kind of investigative power, and it would require an individual with a lot of individual bonds. Therefore, you need a lot of money—for your individual “bond portfolio” to be considered diversified.
An alternative would be to invest in bond funds, in Treasury Bonds or Muni’s. You can invest in bond funds, which is significantly different from an individual bond.
The obvious difference is that an individual bond is just what its name implies—i.e., one bond—while a bond fund is a collection of individual bonds. Before you invest in bond funds, start a series of simple ways to save money first.
Another big difference is that, while an individual bond will mature, a bond fund never matures. (Remember, you can cash-in on your bond when it matures and get your principal investment back).
If you invest in bond funds, it is best to look for one whose individual bonds have average, short-term maturities. As investors get older the tendency to invest in bonds more than stocks, because the fluctuation in prices tends to be lower. Disclosure: I do invest in bond funds, as well as other investments.
- There are high-yield bonds and high-quality bonds.
- High-yield bonds pay higher interest rates but are not very stable; the highest yielding bonds are known as “junk bonds.”
- High-quality bonds pay lower interest rates but are usually more stable than high-yield bonds.
- Bond prices fluctuate: a low-quality, high-yield junk bond’s price could even fluctuate to zero; this would cause you to lose your principal, should you have invested in such a bond.
- The highest-quality bonds are rated “Aaa” and “AAA,” by Moody’s and Standard and Poor’s rating services, respectively; and the lowest-quality bonds are rated “C” (junk), by the same two services
- To decrease your chances of landing a bond with a price that fluctuates too low, it is best to buy short-term bonds.
- There is big difference between individual bonds and bond funds; one important difference is that, while individual bonds mature, bond funds never mature.
Lois Center-Shabazz | Course Delta Agency
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Don’t Let Negative Thinking Place You in Investment Stops, Start Investing Now
Here are 3 investment stops to start investing money for retirement, savings, vacation or just a rainy day. It is essential if you want to ever retire, you must know how to invest.
The 3 Major Investment Stops
I don’t have enough money to invest.
I have to pay off my bills first.
I have money to invest, but I am afraid.
What is stopping you from starting to invest? Three of the most common investment stops are listed above. What can you do to start yourself to invest?
There are many inexpensive ways to start investing. You can open an investment account with a broker that sells shares or partial shares of stocks.
You can open a mutual fund account with a mutual fund company that will allow you to start with a small amount of money. And finally, you will have to shed some old baggage about investing, for example, “I will start investing when I get my bills paid off,” or “I am afraid to invest.”
Start With the Right Investment Priorities:
You don’t have to have a lot of money to start an investment account.
There are mutual fund companies that will allow you to start an investment account for as little as one hundred dollars. You can add as little as twenty-five dollars a month.
The monthly additions work to significantly increase your account due to dollar cost averaging. Low-cost, low-risk mutual funds have a tendency to be less complicated than stocks. But, low-risk dividend paying stocks of stable companies are a good research vehicle as well as mutual funds.
There are companies that will allow you to invest in a few shares or partial shares of stock starting with as little as eight dollars a month. Then, adding eight dollars a month to your account to purchase these shares or partial shares of stocks .
I have to pay off my bills before I start to invest.
It is a good idea to have your debt well under control before you start to invest. The interest rates on outstanding debts sometimes are in excess of the interest rates on investments. Coupled with compounded interest, high debt payments can be excessive.
There is an easy way to invest after you have your bills under control, that is to treat your investment as “just another bill.” Before you know it, you will have a significant investment account.
Do you have plenty of money to invest, but you are simply afraid? I think the term for that is, “fear of the unknown.” That is probably the easiest investment stop we address in this article.
Study the investment tutorials in my eBook and course; Step by Step Car Buying Tips for Women, that can save your financial life. You can download it instantly, and the eBook is practically free, the price is so low.
Then, you can go on to understand high level home buying tips, so you buy the best house for the best prices. Now move on to my free discovery session and enjoy the preponderance of money information there.
Lois Center-Shabazz | Money Strategist | Personal Finance Coach
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Basic investing is a concept all of us should know, but few I speak to seem to know the importance. Many of us have already given up on our deepest life dreams. But I think we should all consider starting a financial resolution.
It’s impossible to turn on the television and not see commercials with yet another famous celebrity touting some magic weight-loss plan.
It is important to be physically fit, but it’s also important to be financially fit, including basic investing.
Women take time off to care for children and other family members, and as a group we are paid less money than men for the same job. According to 2004 labor statistics, as of 2016 the percentages are about the same:
–White women earned 76 cents for every dollar men earned
–Black women earned 71 cents for every dollar men earned
–Latina women earned 59 cents for every dollar men earned
–And Asian women earned 86 cents for every dollar men earned
The number of marriages per year is decreasing. Women often outlive their husbands, and divorce rates are hovering around 50 percent.
This translates into women spending some part of their adult life alone. And even if we do find prince charming later in life, that doesn’t mean he will be financially educated or understand the essentials of investing for savings, retirement, or education.
Thus we have to take the initiative and learn how to become financially savvy and understand many useful and, at least, basic types of investing.
Confidence is key when managing your money and the only way to get confidence is to be knowledgeable. Msfinancialsavvy.com has a lot of tools to help you get started in your quest for financial security, such as tutorials, calculators, and various articles written by experts.
There is also a book for the beginner investor, Live Rich Save Money! From Stocks to Mutual Fund Research in 47 Wonderful Way by Lois Center-Shabazz, which has great tips to help you manage your money. Go her for your free investing book excerpt.
It’s sad but true that many of us graduate from high school and college never really understanding how to manage our money. The first step to financial freedom and prosperity is to master the 5 E’s of Investing.
Educate – Learn all you can about how money works. Msfinancialsavvy.com is a great place to start. The site has a lot of information to help the novice investor on her way.
Emancipate – There are a lot of pessimists around who will intentionally or unintentionally give you bad information. Free yourself from internal and external negative influences.
Evaluate – Smart savers and investors make good decisions by observing and weighing the pros and cons of each situation. They learn about money and the market through research and observation.
Emulate – Savvy investors and savers are participating in job-sponsored 401ks, contributing to Roth IRA, budgeting and diversifying investments. Copying some of these proven strategies can help you on your road to financial success.
Empower – Once you have educated yourself on your money and have come up with a personal strategy, you will feel empowered in your decisions about your financial future.
It is important to master the 5 E’s of Investing now. The earlier you start investing and saving the more you gain.
Saving Money is the First Key to Get Started