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How Do I Invest in Bonds?

Bonds are financial securities issued by both the public and the private sector. They are redeemed after maturity and almost all bonds carry a rate of interest payable at the time redemption. This type of income is non-taxable. Here, it is a good idea to invest in bonds if you are looking to invade too much of a tax burden.

The question in most people's minds is "How do I invest in bonds?" The answer is quite simple.

Remember that bonds, especially those issued by the government have a potentially lower risk of failed redemption than other forms of financial investments (stocks and shares, namely). Although against this safety net you have to pay the price of receiving a lower rate of interest, it is a safer investment option. To check the dependability of bonds, one should follow bond ratings. Although they are confusing to interpret, if you realize the bond that has the highest rating, you have managed to answer your question "How do I invest in Bonds" a little further. Some of the common ratings include Aaa, Aa, A, Baa, Ba, B, Caa, Ca and C. Needless to say that these ratings go from being the highest to the lowest.

Sovereign bonds are those that are issued in a foreign currency. Therefore, invest in those currencies whose economy is financially stable. Because there is a chance of losing out of the capital amount at the time of redemption due to inflationary pressure.

Still asking yourself "How do I invest in bonds?" Here is another guideline. Invest in those businesses that have low risk factors, like multinationals. Consequently, "junk bonds" are at a higher level of risky investment.

Remember that bond prices do not fluctuate like other share prices. Here, keep a closer watch on them to understand the overall movement of the bond market.

Bonds play a huge role in controlling the money supply of the market. Hence, buying bonds at a time of cash crunch in the economy is a stupid thing to do because at point other investors will be selling out their bonds to satisfies their own money demand. This will result in excess supply of bonds in the market leading to a fall in bond price. Here, you lose on your investment.

Investing in those bonds which prices have fallen below par will result in a higher yield than those that have been bought at par. This phenomenon is more pronounced as the date of maturity of a particular bond comes closer.

While asking yourself "How do I invest in bonds" do not forget that in the bond market, the price and interest rate follow an inverse relationship. A bond issued for $ 1000 at 6% interest yields $ 60 per annual. If the new interest is $ 80, then your old bond still yields $ 60, but a new bond in the market will give you $ 80 instead. To understand this better you need to understand the present value of money in the economy.


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