Bonds are issued by government agencies or corporates with the aim of raising money by selling them to the buyers. The buyers on the other hand, earn interests on the bonds every year and at a maturity date, their entire principal amount is returned. There are individual bonds and mutual funds of bonds available as an option to the investor.
Once the bond is purchased, the buyer receives a bond certificate which contains the interest which will be paid to the buyer, the maturity date and amount of the bond. The certificate will be in an electronic form. Note that, if the bond is traded to an investor A, it can be sold and resold among investors from A, any number of times. Such transactions are called secondary market transactions.
It is important to analyze the value of the bond and the interest gained. Suppose a bond is purchased at an issue price of $1000 with a maturity period of 10 years at 5% interest per year. At the end of each year, the investor will earn $50 and the total amount at maturity would equal to $1500.
In a case, the investor decides to sell the bond before it strikes maturity, the amount gained or lost would be dictated by the market price then. It can be sold at a premium if the market value is higher than at the time of purchase, or at a discount if the market value is lower than the initial value.
How to buy a bond?
Bonds are primarily purchased through brokerage firms which have links to the government and companies who want to issue bonds. Apart from setting up the bond plan, they can also set up secondary market transactions for the bond.
The main factors to consider while purchasing the bond is:
- Time period of investing
- Interest earned annually
- Market value predictions throughout the invested period
- Access to secondary market
Before purchasing the bond, it is essential to check the bond rating. The rating value tells the ability of the issuer to pay the interests and complete the principal amount transaction right on the specified times.
After all the evaluation and research is done, the investor might decide to buy the bond. The order for the same can be placed through a brokerage firm. But in many cases, transactions for bonds happen in the secondary market so the investor would directly be communicating with another seller.
The bottom line is although, bonds do not provide returns with high magnitude, it is a good choice if you are looking for a long term and stable investment.
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