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Stilettos and Bonds

By Melissa Gutierrez
Posted On Apr 25, 2016
Stilettos and Bonds

In the first part of my investment series I covered stocks, but now I will be discussing stock’s older and not so hot sister, bonds. If stocks are the vivacious bombshell of the investment world, then bonds are the equivalent of the girl next door- safe and stable. Nonetheless, true investors know the strength of having at least part of their portfolio invested in bonds.

Companies and governments need money to stay alive. Companies need funds to expand into new markets while governments need funds for everything from infrastructure to social programs. Usually, these feats require far more funds than a bank can provide, cue in bonds.

Companies and governments raise money by issuing bonds to a public market. In other words, a bond is nothing more than a loan for which you are the lender. The organization, usually a brokerage firm, which sells a bond, is known as the issuer.

The issuer pays the investor interest payments, which are made at a predetermined rate and schedule. The interest rate is often referred to as the coupon. The date on which the issuer has to repay the amount borrowed (or the face value) is called the maturity date.

For instance, say you buy a bond with a face value of $10,000, a coupon of five percent, and maturity date of ten years. This means you will receive a total of $500 ($10,000*5%) of interest per year for the next ten years and at maturity, you will get your $10,000 back. Sweet!

Bonds are great investment opportunities…but so are stocks.

So which one is right for you?

Bonds are debt, whereas stocks are equity. Meaning, by purchasing equity (stock) an investor becomes a shareholder in a corporation with voting rights and the right to share in the future profits of the company. By purchasing debt (bonds), an investor becomes a creditor of the corporation (or government). The main advantage of a creditor is that they have a higher claim on assets than shareholders do, that is, in case of bankruptcy, a bondholder will get paid before a shareholder. On the other hand, a bondholder does not have claims on the company’s profits.

Bonds tend to be less risky than stocks, but this comes at the cost of a lower return.

Most financial advisors recommend that in your 20’s and 30’s a majority of wealth should be in equities while in your 40’s and 50’s the percentages should shift out of stocks into bonds until retirement; more safe and secure.

No one knows your financial circumstances and goals better than yourself so do not shy away from asking questions and learning more about the financial options available; a calculated risk may just result in your best investment yet!

Stay tuned for the next segment in my mini investment series- real estate!