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Understanding Bonds Investment

Investment in Bonds is vital in asset allocation models prevailing in wealth management strategies. Every investor in the world needs some predictable fixed income in his portfolio. Bond is like a loan given to the issue of the bond for certain fixed period. Depending on terms and conditions, bond pays regular interest income or at maturity. Bonds are issued by the following five types of organizations

1. Government Bonds
2. Government Sponsored Enterprises
3. Municipal Bonds
4. Corporate Bonds
5. Mortgage Backed Bonds

The first three among the above-mentioned have slightly lower taxes with relatively lower yields. Lower returns are as the result of high quality of bonds. Usually, bonds have following features:

• Regular Bonds
• Callable Bonds
• Zero-Coupon Bonds

Regular Bonds

Regular bonds are the one that pay regular interest income till the maturity of the bond. Percentage prescribed on the coupon is relative to par value or face value of the bond. The bond is suitable for investors looking for constant income at regular intervals.

Callable Bonds

Callable Bonds are the one with the option of being called back at any point in time before maturity. Due to presence of this feature, interest rates of such instruments are on the lower side. The bonds are issued for particular market segment who wishes to invest their entire amount and would require liquidity at any point in time

Zero Coupon Bonds

Zero coupon bonds are available at deep discount than its par value and can redeem at par value upon maturity. The instruments are designed to address low aged class of the market. The interest rates are a little bit on the higher side. The major drawback in zero coupon bonds is payment of taxes on annual basis despite the fact you are not receiving at income. The best way to overcome the hurdle is to invest in ‘Zero Coupon Bonds' through retirement accounts to get substantial savings in tax payments. Another disadvantage is unexpected price of the instrument in open market.

Price Factors

Yield is being influence by credit quality, call option and maturity of the instrument. Higher the credit quality, lower the yield. Government Bonds & GSE Bonds offers lower yield as the credit quality is superior. Similarly, longer the tenure, higher the yield of the instrument. Major rating agencies are Moody's & Standards & Poor's(S&P)