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Investments News Saturday 24th November 2007
Saving with Bonds explainedBonds issued by the federal treasury are one of the most popular ways of savings for the masses in U.S. In simple terms bonds are the loans taken out by large organizations like corporations, cities, and the Federal Government. Since the size of entities is so huge, they’re usually required to borrow money from the general masses or banks. The borrowing organization promises to pay the bond back within a stipulated time and pays interest during the term of the bond to the bond holder.Presently, most bonds are held by the financial planning institutions, and interest is automatically accumulated during the life of the bond. Bonds are usually resold by the holders before they mature. Since bonds usually attract a fixed interest payment rate and schedule they tend to look more secure when the economy and stocks market decline pushing the Bond prices higher, but when the stock market is doing well, people are less interested in investing in the bonds resulting in a drop in the value of Bonds. Nowadays bonds are being packaged into a bond mutual fund. This is a much smarter option available to an individual investor. It is less of a risk to let an experienced mutual fund manager pick the best selection of bonds for an individual. A bond fund reduces risk factor, if one corporation defaults on its bonds, then only a small part of the investment is lost and the investor usually gets higher returns. There are many types of bonds available for individuals. For your ready reference we will describe some of the popular Bond types prevailing in the U.S. First of them is the Corporate bond, sold usually by the representative banks. The second is the Junk bond or high yield bond, these bonds are issued by the risky companies therefore they offer higher interest rates to compensate for the greater amount of risk involved. Third comes Municipal bonds; these are generally issued by different cities. Income from these bonds is tax free, but they attract lower interest rates. Next is the Treasury bond, issued by the Treasury Department. The smallest denomination of the above type of bonds is $10,000, which is too large a sum for most individual investors. Besides the above categories of bonds there are bonds like Savings bonds issued by the Treasury Department and are in low enough amounts to make them affordable for individuals. Bonds issued by the Treasury Department are sold through financial institutions and directly from the U.S. Treasury, in denominations ranging from $50 to $10,000. Next of the affordable bonds for the individual is the Series EE Bonds issued by the Treasury Department. The minimum purchase is $25 for a $50 paper bond or $25 for a $25 electronic bond. Series EE Bonds earn market-based rates that change every 6 months. Series EE Bonds issued after 1 February 2003 must be held for at least 12 months before they can be cashed however, bonds issued before than February 2003 could be cashed anytime after 6 months. Bonds and stocks move generally in opposite directions, when stocks go up in value, bonds go down as a general rule. However, sometimes both stocks and bonds go up in value at the same time. This is usually because there is too much money available in the market. Bonds impact the economy by providing extra spending money for the federal government and consumers because Treasury bonds are basically a loan to the government that is usually purchased by domestic consumers. Treasury Bonds also help the consumer, if there is a huge demand for bonds; the federal government lowers the interest rate because the government doesn’t have to offer much to attract the buyers. The lower interest rate means lower interest rates on mortgages too. This allows people to afford more expensive homes. Investors who purchase Treasury bonds would also be in the market for the mortgage securities that banks loan, but rather than hold them for 15 to 30 years, the banks sell the mortgages to the secondary market. Allowing the banks to keep interest rates on mortgages only a bit higher than Treasury Bonds, as the Treasury Bonds have no risk, they can afford to offer lower rates. This allows some tenants that rent to afford their first home. The increased demand stimulates the real estate market, which further stimulates the U.S. economy. Lower mortgage rates also allow people to purchase more consumer products, this also stimulates the economy. Other Investments Recent News and ArticlesWhen Is the Best Time to Start Investing » Settlement of Trusts and Acting as Trustee or Protector » Dollar falls to new lows against sterling and the euro » |
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