5 Important Things You Need to Know About Bonds

Higher Interest Rates Not Good for Older Bonds


There is a common misconception in relation to bonds and high interest rates. Higher interest rates are only good for someone purchasing a new bond. Older bonds are not seen as valuable when newer ones with higher interest are offered. Therefore, old bonds lose their value when interest rates for new bonds increase.

More people are choosing short-term bonds over long-term to adapt to new higher interest rates on the market. Remember, it is only beneficial when bond interest rates increase.

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Bonds for Your Children


Security bonds can be a valuable investment for kids. For obvious reasons, kids might not seem enthusiastic about this investment, but one day when they are getting ready for college, or pursue another venture that requires money, they will thank you.

Instead of worrying about opening a saving's account or cash, consider a bond. The beauty about bonds is that they are exempt from both state and local taxes. Series EE and Series I bonds are completely tax-free if the intent is to use them for educational purposes.

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Long-Term Bonds No Longer as Valuable


Long-term bonds have higher interest rates than short-term bonds. They are usually separated by at least 2 percent or more. It appears that long-term bonds can yield a higher investment reward but that has changed in recent years. The reason for this is because when you get locked into an interest rate that eventually increases, you are stuck with that rate for an extended period of time, and you wind up earning less.

Short-term bonds allow you to earn your money back with interest in as little as a couple of years. The money you get back can be used to make another promising investment so that you can continuously adapt to changes in the market, and maximize your investments.

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Individual Bonds vs. Bond Funds


Individual bonds are viewed by some as more secure than bond funds, which have fluctuating monthly income payments. The biggest upside is that most individual bonds have monthly, quarterly, or semi-annual fixed income payments.

Individual bonds are managed by the investor, who must remain current with market changes to make wise investments. Much time and energy is needed to manage individual bonds.

Conversely, bond funds are typically managed by skilled investors. The investors look for bonds with the most promise.

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Bonds With Inflation Protection Still Vulnerable


Treasury Inflation Protected Securities, also known as TIPS, are seen as risk-free bonds. Inflation-protected bonds are only secure if the person that holds the bonds sells them on the date they mature, otherwise they lose their value.

TIPS are supposed to be backed by the United States government. So as long as the government holds their word, investors can expect to receive the principal and interest that they anticipate.

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