5 – BONDS – Wanna take some IOU’s

Bonds are the obligations or IOU’s of whoever issues them. Bonds are essentially IOUs issued by companies or governments, and the rewards offered are proportional to the level of risk involved. The higher the reward means the higher the risks. They all suffer from a risk of sorts; maturity. They supposedly offer a fix return for a period of time, but the best paying bonds are the longest terms. So there is risk going out, and if you have to sell them before maturity depending on condition, the value is lowered by the demand for it. So when you buy a 15 year bond, do you know what the interest rates are going to be like in 15 years? If the rates go up, your money would have been better of in something else. Some bond brokers would sell the bond, take the loss and move the money into a newer bond. If interest rates drop then your high value bond is actually worth more than its face or stated interest would describe. It used be that in a pinch you could borrow against them, that is now much harder.

There are various kinds of Tax-free government bonds. They should only be used by people with very high tax brackets. You have to look at overall ROI on bonds. A 10% taxable may or may not be better for you than an 8% tax-free depends on your circumstances. No hard set of rules, consult a tax expert, not the guy selling you the bond. It might be easier to shield the income than raise the lower return. Many formerly tax free bonds are no longer as tax free as they used to be.

The most important factor is the quality of the Bond, not too long ago GM bonds would have been considered AAA+. Their value went to zero in the bankruptcy of GM. So you mention government bond, well so far, US T-bond are safe, long term who knows? California and few municipalities are close to bankruptcy.

So is buying their bonds prudent? I don’t think so. Do people make money in Bonds, sure the bond traders do, selling them to you. Most regular people don’t, they buy stock. Consider Bonds as the last place to invest your money when you have everything else, and interest rates are high and going lower.

It is important to consult a tax expert and carefully evaluate the risks and benefits before investing in bonds.

“Neither a borrower, nor a lender be. For loan oft loses both itself and friend.

This portion from William Shakespeare’s ‘Polonius advises Laertes’ is relevant even today.

It is a piece of advice to people who often borrow money and forget to pay.


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