This is a short insight on Types of Bonds and which ones will suit you best as a dedicated bond investor. The post is aimed at guiding you on how to do bond investments in 2019 and beyond. It focuses on the bond options that work for tech, business, and general investors.
When it comes to the bonds investors choose to invest in as stores of wealth and profit-making assets, the general consensus is that the foremost consideration should be the type of entity that issues the bond itself. The reason this is so important is the fact that you are essentially placing your faith in their ability to pay you back, with interest, at a later date in time.
That’s why you want them to be as reliable as possible, or else you will ask for a higher return on your investment should their risk levels be relatively high.
When classifying different types of bonds, this is the prime factor considered, and even makes up the main trait by which bond types are named.
In this piece, we’ll take a closer look at the various bonds available out there and what characteristics separate them, giving us a better understanding of what investors should look for when searching for bonds that will help them attain their investment goals.
Let’s get right to it.
These are considered the most reliable types of bonds because they are backed by the federal government when the government needs some cash to fund budget deficits. This makes them virtually free of credit risk, as well as being free from state income tax charges.
The downside of all this is the fact they are generally the lowest-yielding bonds available. Go for them if you’re looking for sound investments in poor economic times.
Investment-Level Corporate Bonds
Investment vehicles and companies with considerably powerful and healthy balance sheets have the ability to issue bonds on their own authority. These are entities that have been accorded a minimum BBB rating (with AAA being highest, then AA, and so on) by Moody’s Investor’s Service, Standard & Poor’s, or both. They are thus considered relatively secure investments.
Though fully taxable at state and federal levels, they offer investors higher yields than treasury bonds. In tough economic environments, Treasury bonds will slightly outperform them.
High-Yield Corporate Bonds
These are closely related to investment-level corporate bonds, aside from the fact that they are issued by companies or investment vehicles with somewhat weaker fundamentals and balance sheets. They offer investors higher returns in order to compensate for the increased risk of default they expose their investors to.
High-yield corporate bonds are great options to look out for in 2019. They can help you diversify your investment goals and create multiple streams on investment returns.
These types of bonds are a marked departure from what we’ve looked at so far. You will have some foreign bonds denominated in dollars, but for the most part, they will be denominated in a mix of dollars and foreign currency with an average third of its assets being in the foreign currency.
With these bonds, the issuers will make the promise to investors to deliver fixed interest payments in addition to returning the principal bond amount in the foreign currency indicated in the bond provisions. This essentially means that the value of the payments, whose specific figures have already been determined beforehand, may vary according to the prevailing exchange rates at the time payment will be due.
You will then see the dollar amount of foreign payments diminish should the dollar grow stronger against the foreign currency while the reverse will also hold true. Exchange rates thus have a much stronger influence on the quality of foreign bonds than prevailing interest rates.
These types of bonds stand out immediately because of the amounts they bear. The average mortgage-backed bond will bear a face value of $25,000, which is a world away from the average $1,000 – $5,000 that other bond types will bear.
They do, however, carry a so-called pre-payment’ risk with them, which means that as the mortgage prepayment rates rise, the bonds will not enjoy or have the benefits of falling interest rates that other bond types would.
Popularly referred to a munis’, these are types of bonds that are issued by local governments, their agents, or U.S. States themselves. You will find these bond types in both the high-yield as well as the investment-grade categories.
The fact that these bonds are tax-free doesn’t necessarily mean that everyone that goes for them will make a good return on their investment. The fact that the yields from munis are lower than taxable yields to offset the tax requirements makes the possibility of a good return dependent on the tax bracket you fall under.