What Are the Advantages and Disadvantages of Buying Bonds?

Bonds are issued by both the government and private sectors when they intend to borrow the money from the public. Bonds are in a different category of investment from stocks as they are not purposed to gain from capital appreciation. However, bonds could be one essential elements in your investment portfolio as they generate streams of steady income which could prove vital especially whenever there is bear market.

Same as other investment tools, bonds have their own advantages and disadvantages.

Advantages of Bonds

• Less volatile. Bonds are generally one of the most secure investment tools in the market. Therefore you do not have to worry about the fluctuation which could shrink your assets significantly overnight. If you are a type of investor who react negatively to market fluctuation, then investing in bonds could be one of the better options.

• Steady income. The primary objective of buying bonds is to receive constant income. You could often expect when you would receive it year after year, usually without a miss. It is good especially to those retirees as the income is needed to fund their everyday expenses.

• Predictable in nature. When you invest in a bond today, you would know immediately by when you would get back your capital. In usual circumstances, you do not have to worry about whether you could get back your principal in full. It is perfect to a conservative investor.

• Higher yield than savings account. Putting money in savings account would definitely safer, but you should also expect shrinking in its value if the inflation rate is higher. Invest in bonds could overcome this problem or at least minimize it.

Disadvantages of Bonds

• Certain level of risks involved. The factor most bond investors fear in is the bankruptcy of bond issuers, especially those of the corporate companies. Municipals can go bankrupt as well but it is less likely compare to corporate companies. Government bonds should be considered the safest to invest in, but you have to settle with lower interest rates.

• Relatively lower yield in long term. Most of the people like to compare investing in stocks to bonds. Bonds tend to earn lower return in long term than stocks. Therefore, to maximize investment profits in long term, bonds are not a good investment tool, thus making it out of favor among the youngsters.

• Opportunity cost. Bond investors usually invest their money to buy long-term bonds if they want to earn higher yields. As a result, their money become inflexible and they become worse-off whenever the interest rate increases.

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