How are bonds an effective investment tool? Okay, here’s the lowdown
on how bonds work. The best thing to start first is to compare bonds
with loans. Yes, they have similarities, but the key difference is
that a bond need not be held to maturity by the same party, it can be
traded before then. A loan, however, is strictly held between two
parties.
So, this answers a key question I had about bonds. Must you be
limited to receiving the payments on the coupon schedule until the
maturity date? No, unless the bond is of the investment type that
must be held to maturity. If you’d otherwise feel inclined to get the
value out of the bond faster, you can trade the bond for other
instruments. So, you need not worry about needing to create a loan
and then use a bond to pay back the loan. You can just go straight
away with bonds.
Other good info about bonds. Bonds are dependent on the interest
rates, but if they are held to maturity, they should pay back their
full principal value even in the face of fluctuating interest rates.
The disadvantage mainly comes from trading before maturity. Bonds are
pretty good means of diversification. And finally, bonds, like loans,
have the risk of defaulting, though some bonds are inherently less
risky than others.
20201016/DuckDuckGo how are bonds useful as an investment tool
20201016/https://www.investopedia.com/articles/bonds/09/top-uses-bonds-investments.asp
20201016/DuckDuckGo bonds and loans
20201016/https://www.wallstreetmojo.com/bond-vs-loan/