Christopher Best — The Advantages of Investing in Bonds
Christopher Best studies finance at Florida International University and has learned a lot during various investment vehicles and their pros and cons during his studies.
If you are a conservative investor looking to diversify your portfolio with low-risk investments, you should take a look at various types of bonds. Bonds usually have higher yields than bank accounts without the unpredictability of the stock market.
Bonds are very similar to regular certificates of deposit. The only difference is that the value of bonds can fluctuate. For example, you can buy a bond from a company such as Coca-Cola. Let’s assume that the bond will mature in five years and will pay you three percent interest. This means that Coca-Cola will be sending you interest payments for five years and, at the end of the term, you will get your original investment back in full. In effect, buying a bond in this scenario is similar to lending your money to Coca-Cola.
The worst thing that can happen is that Coca-Cola goes into bankruptcy. If this happens, you may lose your investment and remaining interest payments. However, bonds from big companies with household names are very safe. Bond investors are usually willing to deal with the risk of a default because bonds pay better interest than bank accounts do. The catch with the bonds is that their value may go down if interest rates go up.
Just like with stocks, you can sell bonds any time when the financial markets are open. Students of finance such as Christopher Best know that investing in bonds is a great choice if you are looking to save money for a major purchase, diversify your portfolio, or are interested in long-term safe investments that create income on a regular basis.