Bonds – Great Money Generating Instruments

Debt instruments that companies, municipalities and governments issue in order to raise funds for financing their capital outlay are known as Bonds. It is a type of a formal contract to payback the debt with interest within a certain interval of time. It is basically like a loan where on one hand the issuer is the borrower and the holder is the lender and the coupon is the interest. It helps a borrower in finance of long- term investments by providing external funds or in case of government bonds to finance current expenditure.



By buying a bond, an investor loans money for a specific time period at a predetermined rate of interest. While the interest is paid to the bond holder at regular intervals, the principal amount is repaid at a date, known as the maturity date. While both bonds and stocks are securities, the vital difference between the two is that bond holders are lenders, while stockholders are the owners of the organization. Bonds are commonly said to be as fixed-income securities and are one of the three main leeway classes, along with stocks and cash equivalents. The categories that comes bonds are corporate bonds, municipal bonds, and U.S. Treasury bonds, notes and bills, which are altogether referred to as simply "Treasuries".



Two important features of bond are Credit quality and Duration

These are the principal determinants of a bond's interest rate. Bond maturities range from a 90-day Treasury bill to a 30-year government bond. Corporate and municipals are typically in the 3 to 10-year range.



As stock market all over the world continues to struggle and the current scenario of softening interest rates projects an image of a good alternative, investors are looking out for an opportunity in debt instruments issued by companies, particularly those in egress markets such as India.

Corporate bonds, alike all other bonds, trade according to the interest rate loop. Longer maturity periods generally tend to offer bondholders higher interest coupons.



Apparently, bondholders sense interest rate risk with longer-term bonds. Besides the fact that there are lots of potential pitfalls in holding to corporate bonds that an investor definitely needs to be aware of but bonds is certainly great tool to generate money compared to stocks. There are quite a lot of risks attached to bonds and one of the most well-known risk is interest rate risk where bonds price falls with increase in interest rates.



The other most common risk that comes in way of corporate bonds is liquidity risk where the investors face the situation when they are unable to sell there bond due to thin market, and there are very few buyers and sellers for the bonds.

Bond being one of the safest investment tool and money generating machine has many inherent risks as well and hence its very important for an investor to keep these major risks in mind before dabbling in this brook of money.