Many folks out there think of stocks when they think of investing. Well, my wise friends, that is only one piece of the puzzle. One of the most overlooked investments is the individual corporate bond.
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What are they?
When a business wants to raise a large amount of money, they issue bonds. You purchase the bond and the company pays you a predetermined amount of interest (usually monthly, quarterly or yearly) for a set amount of time. At the maturity date of the bond, you get the principal back. So basically, you are acting as the bank and making a loan to a company.
Why own them?
Good question! Here’s the answer: They may help add stability to your portfolio. It’s nice to know how much interest you will receive and when you will get it. Plus when the stock market is volatile, you know you have a holding in your portfolio that is giving you a consistent return.
Here is an example: A bond may pay 6% interest and has a 20 year term to maturity. That means that on a $10,000 investment you will receive $600/year x 20 years = $12,000 interest over the life of the bond, plus you get back the initial $10,000 that you invested. That’s a 120% return on your initial investment plus your principal back! (This is a hypothetical example for illustrative purposes only and is not representative of any specific investment. Your results may vary).
Other stuff you should know: Sometimes companies have severe financial hardships or go bankrupt. If they do, they can default on their bonds, which means that you can lose your future interest payments and/or the principal that you put into your bond investment. So if you are looking at purchasing bonds, look at their credit rating. AAA is the best rating , anything that is BB+ or below is considered to be a “junk” bond and is very speculative.
Redemption: Can you sell bonds early? Yep, you can. The value of the bond can fluctuate, though. It may be worth more, the same or less than when you purchased it. So if you do sell it before the maturity date, you may lose money or make money. Many factors can affect the price of a bond, including interest rate changes, credit quality of the company and what the stock (equity) market is doing.
It is best to speak to a financial professional before you venture into the world of bonds! See if they are right for you and your current financial situation.
Sharon L. Herman AAMS, ADPA is the CEO of Silver Key Wealth Management, and affiliated with LPL Financial, the largest independent broker/dealer* in the United States. She is a member of the Working Women of Tampa Bay, the Sierra Club, and the Audubon Society. She is also a 2012 finalist for the Tampa Bay Business Woman of the Year award given by the Tampa Bay Business Journal based on community volunteerism, business principals and customer satisfaction.
*Financial Planning Magazine (June 1996-2012 based on total revenue)
The opinions expressed in this material do not necessarily reflect the views of LPL Financial.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Independent Financial Partners, a registered investment advisor and separate entity from LPL financial.