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Bonds

Bonds – Are They Good Investments?

Bonds – Are They Good Investments?

Bonds are a security and are generally good investments for the older crowd who wants to earn higher interest rates for income. Bonds also belong in younger portfolios to enhance investment balance. But beware; the Big Bad Wolf may be knocking on the bond investing door.

In 2009 you couldn’t make 1% a year in the safest investments with easy access to your money. Examples include: money market bank accounts, short-term CDs, T-bills, savings accounts, and money market funds. But you could earn more than 6% in some bonds and over 4% in the safest ones in the world, the U.S. Treasury bond. Why not jump on these good investments?

The answer is that bond investing carries risk… more than the average new investor thinks. First, there is credit risk. The issuer of the security could get into financial trouble and fail to make timely payments of interest as promised. Even worse they could go broke. This risk can be greatly reduced by putting your money into a bond fund vs. an individual issue.

Interest rate risk is another animal altogether, and with interest rates at all-time lows the wolf is huffing and puffing at the door of bond investing. Unfortunately, the new investor is likely unaware of his presence and does not sense the danger. In a few minutes, you’ll get the picture.

When you buy a bond you are lending the issuer (like a corporation) money for a promise that reads something like this. “Lend me $1000 and in return I’ll pay you 5% a year in interest. In the year 2035 I’ll pay you back your $1000.” After the issue is originally sold to an investor, it then trades in the secondary market. The good news is that the bond can then be bought and/or sold any time between issue and 2035.

The scary news is that the price or value of the security changes as it trades in the market. When interest rates are falling these fixed-interest-rate investments go up in value. When interest rates go up, interest rate risk can bite you in the posterior… because bond prices (values) go down.

That’s how bond investing works. Picture owning the 5% security we used as an example. As long as the issuer remains financially strong and interest rates remain stable, your investment should be worth about $1000. What would happen if rates in the economy headed toward 10% for similar bonds being issued? Remember, your 5% rate is locked in until 2035.

Only a fool would offer you $1000 for a security that pays $50 a year when any investor could get closer to $100 in yearly income in the open market. There are plenty of fools out there, but no one is that dense. Your investment is headed toward a ½-off sale.

Bonds can be very good investments when interest rates are falling. They are not good investments when rates are on the rise. It doesn’t matter if you are rich or poor, young or old, new investor or experienced. The wolf is knocking on the bond investing door, and sooner or later interest rates will go up. Don’t let interest rate risk take a big bite out of your investment portfolio. Don’t chase bonds just to earn higher interest rates.

A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.

Jim is the author of a complete investor guide, Invest Informed, designed for average investors or would-be investors of all levels of financial background and experience. To learn more about investments and investing and his new financial guide go to http://www.investinformed.com.

Calculate United States Savings Bond Values At Maturity

US Savings Bonds Value – How to Calculate United States Savings Bond Values At Maturity

In essence, the investor of a US savings bond is loaning the US government his money since it is a treasury security. In keeping with the times, savings bonds are issued both in paper and as electronic bonds.

Pros and Cons

An advantage of savings bonds is that the interest accrued on them need not be reported to the federal government for taxation purposes unless and until they are cashed. An exemption is when these savings bonds are used for the education of the holder, his spouse or his child. Plus, investors are assured of payment since the government itself is the debtor.

One disadvantage is the fact that it cannot be traded by the owner, only redeemed after one year. There are no dividends on the bonds per se, only interests accruing on it, unlike stocks. Plus, if you do decide to have it cashed less than 5 years after its issue date, 3 months worth of interest will be deducted as penalty.

All in all, however, they are great investments for the future, not to mention that it pays to diversify your portfolio with a relatively stable investment than, say, stocks.

Calculate Its Worth

You have to know what you are worth where savings bonds are concerned especially when you want to cash them in. You can either do it the manual way or the electronic way. Of course, the manual way presents more challenge for a math pro. You start by taking note of the savings bond’s face value and the interest rate assigned to it. Then multiply the face value with the interest rate taking into consideration the present or future time you want to cash it in to arrive at the accrued interests. Now, add the accrued interest to the face value, deduct any penalties, and you have the savings bond value.

If that seems like too much of a challenge, you can always log on to the Savings Bonds Calculator of the Treasury Department. You will have an easier and faster time arriving at the final amount, not to mention that it is right on the money, so to speak.

* Access the online savings bond calculator and choose the series to which your bond falls into.

* Enter the issue date of the bond

* Enter the “value as of” date to arrive at past, present or future values

You can build an inventory of savings bonds if you have multiple bonds to calculate values for.

Notes to Remember

Savings bonds are available to US citizens with social security numbers as well as to residents of Puerto Rico. If you are a foreign resident, the company in which you are employed must offer a savings plan for you to avail of the US savings bonds. Also, you must take note that a savings bond issued at half its face value will attain its full face value at the time of maturity while a savings bond issued at face value will double in value at maturity. If cashing it in less than 5 years after date of issue carries a penalty, then redeeming it past its maturity date also carries rewards in the form of yearly interest.

US savings bonds have their value in your investment portfolio. After all, you will be assured of payment no matter the state of the economy.

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Learn more about how savings bonds work. Visit http://www.bond-trading.org/ for profitable bond trading strategies.

Bonds

Overview

A bond is essentially a kind of loan, or I.O.U.

Types of bonds:

  • Treasury bills (“T-bills)
  • Treasury notes
  • Treasury bonds
  • Zero-coupon bonds
  • Inflation-indexed Treasurys
  • Mortgage-backed securities
  • Corporate bonds
  • Municipal bonds (or “munis”)

Articles

US Savings Bonds Value: How to Calculate United States Savings Bond Values At Maturity

Bonds – Are They Good Investments?: Bonds are generally good investments, but they carry more risk than the average investor thinks.

Resources

CNNMoney Bonds Center: Learn the basics of bond investing, get current quotes, news, commentary and more.

Yahoo Finance Bonds Center: Learn the basics of bond investing, get current quotes, news, commentary and more.

Bonds – Basics: The basics of bonds.