These daily financial tips are designed to be short ideas covering different aspects of family and business finances. They are short pieces intended to provide information to enable individuals, families and businesses to make informed financial decisions. Not all tips will apply to every situation, but over the course of a year, most financial topics will be covered. Check in regularly and share with friends and associates.
There are many different types of asset classes one can invest in. Each asset class has different investment characteristics. The main asset classes are cash or cash equivalent, bonds, stock and real estate. No one asset class is better than the other. Depending on your family circumstances, stage in life and timeline, the different asset classes or combination of them may be appropriate.
Today I will focus on bonds and their characteristics. Bonds are considered a more conservative type investment as it doesn’t have the same volatility as stocks and is fairly liquid/easily cashed. Bonds represent a borrowing vehicle or way for companies and governments to raise money. In exchange for cash, companies and governments will issue bonds which have a prescribed interest rate and maturity date. If held to maturity, you get your money back. While bonds can be bought by individuals, many purchase bonds through Mutual Funds.
Things to consider when purchasing bonds, besides the term and interest rate are: What is the stability and credit worthiness of the company/government issuing the bond? Investors want to ensure the company/government issuing the bond will be around and have the ability to repay the monies when they come due (ie don’t default or go bankrupt). What are the terms of the interest payments? Interest payments can be paid monthly, quarterly, annually and there may be other terms for payment of interest.
Bonds are not guaranteed (like GIC). They are only as solid as the underlying company issuing them. The price or value of bonds will fluctuate over time. They are not fixed like GICs. Current interest rates will have significant impact on the value of bonds. As interest rates rise/increase, the value of bonds decreases, and conversely, as interest rates decrease, the value of bonds increases.
Bonds do serve as a vital investment strategy within most peoples investment portfolios. How much bond investments and what kind of bonds one should hold in an investment portfolio will depend on family situation, risk tolerances, and timelines. It is best discussed with an investment specialist or Certified Financial Planner.
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