Why invest in bonds?

Investing in bonds is a great way to preserve your capital and earn steady cash flow.

14:30 04 February 2013

Bonds are some of the most common form of investment. Basically, an issuer (which could be the government or a corporation) borrows money from the investors with the promise to pay interest on top of the capital that will be given back on the maturity date. 

 

Why invest in bonds? 

 

Different forms of investment have different risks and return of investment. For those people who are looking for higher earnings and can tolerate bigger risk of losing their capital, they may opt for stock trading or share dealing.

 

However, those people who are after preserving their capital while earning fixed interest over a specified period of time, bonds are highly recommended. 

 

Bonds are relatively safe compare to equities as they are almost always paid out (unless the company goes bankrupt).

 

There are different types of bonds. The ones that yield low interest rate are those that are offered by stable companies. Since there is very little chance of bankruptcy, the issuer doesn’t need to promise huge interest rate to attract investors. 

 

On the other hand, unstable corporation usually promises huge interest to ensure that investors will buy their bonds. 

 

When choosing, ensure that you know the risks that you’re taking. If you’re very new in bonds investing, it’s safe to invest on companies that are very stable otherwise; you may not see your capital ever again.