What exactly are bonds? And why can they be so helpful in gaining wealth? As Carlos Hank Rhon explains, A bond is like an IOU, a security of debt in which an individual loans money to a business corporation, government, or federal agency. In return for the money, that organization provides an agreement that promises to pay a specific rate of interest during the bond’s life and to repay the value when it matures.
There are several different types of investment, such as government securities, municipal bonds, corporate bonds, and foreign government bonds. Financial advisors will advise their clients to keep a diversified investment portfolio, one that includes bonds, stocks, and other cash depending on that person’s or that company’s objectives.
Bonds can provide a predictable income stream, allowing for many people to invest for the expected interest and to preserve their capital investment. Bonds can also be used for retirement planning; during the past decade, more and more people are replacing the pensions by 401ks and IRAs because they offer a greater sense of freedom in investment options. Online investing has also helped many individuals get more involved in the investment process.
Bonds can also be used for savings for large purchases, such as a child’s college education, a new home, or even retiring. The disadvantages to bonds and any investment is that of the risk involved, however the rule of thumb among finance and investment professionals is the higher the risk, the higher return the individual will see. Interested individuals should do as much research as possible to assure that the bonds they choose work well for them.