What are Bonds?
Bonds are a mythical subject to many. In fact, most people don’t even know what bonds are or that they even exist! I want to take the time to explain what bonds are, the different kinds of bonds, and how you can take advantage of them. These types of securities are not the sexiest of financial tools but they are very important to the daily function of our government. The topic of bonds can get a little complicated and confusing so I won’t get in the weeds of it here. I will give you an overview of the important stuff and I can provide you with resources that will help you understand it further. So, What are bonds?
What are Bonds Anyways?
Bonds are a type of security that instead of being equity, like a stock, is a type of debt. Let’s simplify this by just discussing it from a company perspective. Instead of going to a bank, the company/government gets the money from investors/citizens who buy its bonds. Regarding bonds, understand this one thing the higher the risk the higher the yield (or money they pay you per specified period).
Different Kinds of Bonds
There are many types of bonds out there. I will keep this article to frequently traded bonds. Those are Treasury, Savings, Corporate, Municipal, and Agency. FINRA.org is a great resource if you want to learn more about bonds. Below I will discuss each in a little more detail:
Backed by the US Government these are the safest securities. They tend to have the lowest payout but they are guaranteed. The maturity dates for these types of securities have a few ranges. Firstly, is the short term which is 1-3 years. Secondly, is the medium-term which is 10 years. Finally, we have the long term which is 30 years. Typically, the longer you hold them the lower the yield. Kind of like getting a loan and you put the longest time possible to pay it back.
Backed by the US Government these are very similar to the treasury. The use is a bit different though. These securities are used to help pay the US Government borrowing needs.
This type of security is literally like the Treasury and Savings securities, but it comes from corporations. This is not backed by the US government, so it is seen as a little bit riskier. These securities vary in risk. You’ll hear the term “junk bonds” thrown around, those usually mean corporations with very poor Bond ratings. Those are decided by three agencies. Moody’s, Standard & Poors, and Fitch. They determine the rating of a corporation much like Equifax determines your credit ratings for banks. Which is how they determine whether it is a junk or “Triple-A”.
This is what I like to call the rich people bonds. Nothing more than typically only the wealthy find this type of security lucrative. These are issued by the state, cities, counties, and other government entities, not the federal government. They fund day-to-day obligations and finance capital projects such as building schools, highways, or sewer systems.
This security is very similar to treasury securities. The biggest difference, they are issued by other federal entities, other than the treasury. Agency securities fund a public purpose, such as affordable housing.
How Can you Take Advantage of Bonds?
Like with investing in stocks, if you want to take advantage of bonds you have to get in the game! It’s just that simple. Getting into this market can be quite unexciting. You can buy them from your broker at whatever brokerage company you use or you can buy them directly from the issuer. For treasury securities, you can buy them directly from Treasury Direct. You can buy Corporate bonds through brokerages like Fidelity and Merril Edge. For Muni bonds, you can buy them directly from the Municipalities, it’s usually through their websites.
Buying bonds can be boring and unexciting. This article was just to give you enough information to get yourself in the game. Like with stocks the best way to learn is to just get in the game and do it. Wish it wasn’t that way but it just is. I encourage you to do more research and understand bonds a little more. It will definitely help you in the future I promise. Knowing more about the assets that are offered in our economy is important to have a holistic understanding of wealth. So, I implore you to continue to do your research on all types of securities, especially the ones that were talked about here.
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