Understanding The Types of Bonds For Your Fixed Income Investment

When you purchase a bond, you are buying a financial instrument in which the issuer of the bond is taking your money with a promise to pay it back with interest. Bonds are sometimes referred to as a debt security, and their terms dictate when and how much the issuer pays you back. Unlike stocks, which have no clear timetable and rate of return, bonds clearly state how much interest the issuer will pay and when. Monthly, semiannual, or annual are the usual time-frames.

There is also a maturity date fixed to the bond. This date is when the issuer will also pay back the original principal paid for the bond. A very simple example is that you purchase a $50,000 bond with a ten-year maturity date with an interest rate of 3% payable annually. Every year you will receive $1500 as an interest payment, and you will get back your $50,000 investment after ten years.

Once you buy a bond, you can transfer it into the secondary market where it is bought and sold, similar to stocks. In other words, a bondholder does not necessarily have to hang on to a bond until its maturity date. He can sell it ahead of time. While bonds are thought of as a stable investment, they can have high volatility based on the how the general interest rate is doing.

Potential investors look at the credit rating of a bond as a leading indicator of the amount of risk involved. The higher the credit rating, the more secure the investment. Credit rating agencies such as Standard & Poor’s and Moody’s use letter designations, which characterizes the soundness of a bond. Moody’s assigns bond ratings of Aaa, Aa, A, Baa, Ba, B, Caa, Ca, and C. Standard & Poor’s ratings are similar: AAA, AA, A, BBB, BB, B, CCC, CC, C, and D.

Government Bonds

Government bonds are issued by a national government. In general, the government promises to pay periodic interest payments on the bond and to repay the face value on the maturity date. Government bonds are usually issued in the country of origin’s currency. United States bonds are in dollars, of course, and backed by the “full faith and credit” of the United States government.

If you are considering investing in United States Treasury securities, you have a choice of three different bond maturities
  • You can invest in short-term (known as “bills”) with a maturity of between one and five years. (Financial instruments that mature in less than a year are known as Money Market Instruments.)
  • You also have medium term maturity between six and twelve years (known as “notes”).
  • Finally, there is long term (bonds) that have maturities greater than twelve years.

Municipal Bonds

Municipal bonds are issued by a local government, territory, or their agencies. Issuers of municipal bonds can be states, counties, cities, school districts, redevelopment agencies, special-purpose districts, publicly owned airports, seaports and utility districts, and any other government entity at or below the state level. Bonds usually finance capital infrastructure projects needed over the long term. The needs vary greatly, and can be for streets and highways, schools, bridges, public housing, hospitals, sewer, power utilities, water systems, and other various public projects. You can good bad and ugly about Municipal bonds here.

Corporate Bonds

Corporations issue corporate bonds to raise capital for a variety of reasons. It can be for ongoing operations or to expand the business. The term “bond” usually applies to securities with a maturity of at least one year. Corporate debt instruments with a maturity shorter than a year are known as commercial paper.

The interest earned (coupon value) on corporate bonds is usually taxable income for the investor. It is tax deductible for the corporation paying it. Sometimes the coupon can be zero. When this happens, the zero-coupon bond sells at a discount. For example, a $1000 face value bond sells for $800. The investor pays $800 but collects $1000 at maturity.

Because the volatility of bonds is lower than that of stocks, they are considered a safer investment. Bonds are not subject to the day-to-day unpredictability of stocks. Their interest payments are sometimes higher than the general level of dividend payments in equities. For many investors, the general certainty of a fixed interest payment twice a year and a fixed lump sum at maturity are attractive.

With bonds, as with all investments, you need to have the best information possible when deciding if you want to invest in government, municipal, or corporate bonds – or some combination of all three. The broad view of bonds is that they are a good investment and should be part of your portfolio in some fashion. However, general account based cash value life insurance, also known as whole life insurance, can be an attractive alternative to a mid-term and long-term bond portfolio with comparable higher return, low risk and added tax & life insurance benefits. Also, fixed annuity could be a great alternative for the appropriate investors due to security, guaranteed retirement income and favorable tax treatment.

Investment and wealth creation is much harder than most people think or even understand. The founder of world’s largest hedge fund and 25th richest man in USA, Ray Dalio says to Bloomberg that “it is harder to win in stock market than competing in Olympics”. If you like this article then you will also like my special report – “SPECIAL REPORT REVEALS HOW TO RECOVER YOUR RECENT STOCK MARKET LOSSES QUICKLY & SAFELY WITHOUT LIQUIDATING OR REPLACING YOUR INVESTMENT ADVISOR”. You can get this FREE special report here. We have been helping more 3000 physicians, 1000 dentists, 3000 successful business owners and 600 independent pharmacy owners create most optimal asset allocation, reduce taxes and create sizable wealth for last 20 years. We don’t have magic wand but we know thing or two that works. If this something you want for yourself then please call (877) 972-3262 or contact us now.

Our Success Speaks for Itself!

Are you ready to be part of this exclusive group of smart & successful individuals?

3000

Physicians


1000

Dentists


600

Independent Pharmacists


3000

Business Owners


Testimonials

WHAT OTHER HIGH INCOME EARNERS HAVE SAID….

Regardless of the topic or question, BeamaLife has unique individuals with the right background to address my concerns. As a result, I have a much clearer understanding of how certain wealth creation strategies were the right fit for my company. I also have been able to take much higher income tax deductions for the corporation by implementing a plan set forth by Neil Jesani. They have maintained an unmatched level of professionalism during my interactions with them over the years.”

Mr. Peters
Software Company Owner, California

“BeamaLife was referred to me by my CPA for my pension plan funding. I also wanted to take care of my estate tax need. Neil and his team have done a superb job of creatively funding my pension plan, acquiring most cost-effective life insurance for our estate planning need with very minimum out pocket using velocity of money principle and putting my existing investment to second use. They also help us setting up all our estate planning documents.”

Dr. Martin
New Jersey

“BeamaLife has been a great advisor to us for many, many years. They not only helped us take higher income tax deductions but, also helped us organize our investment portfolio in an efficient manner. Through this relationship, we were able to create substantial wealth with the very low out-of-pocket expense. Neil Jesani from BeamaLife is very responsive, professional and extremely knowledgeable”

Mr. Sakaria
Multiple Pharmacy Owner, New York

As Feature On