This is the fourth part of our introductory series in Appreciation against Preservation. And we are nearly done all of our info on the bonds side. Today will focus on the various bond issue or create by corporate and governmental bonds. Bonds come in many different varieties, and here we will cover just the most common types.
These types of bonds can be issued by national and federal governments as well as local city and state government agencies. At the federal or national level, these types of bonds are know as “sovereign” debt, and as backed by said nations ability to tax its citizenship and/or print its own currency. In the U.S bonds are classified according to the maturity timeframe set. Bonds maturing in a year or less are generally referred to as “Bills”; one to ten year old maturity dates are referred to as “Notes” and are only actually called “Bonds” if they mature after a ten year target date.
All debt issued by the U.S. government is regarded as extremely safe, often referred to as “risk-free” securities, as is the debt of many stable countries. The debt of developing countries, on the other hand, does usually carry substantial risk.Credit ratings agencies also rate a country’s risk to repay debt in a similar way that they issue ratings on corporate bond issuers. Countries with greater default risk must issue bonds at higher interest rates – which essentially increases their cost of borrowing.
Municipal bonds also known as “munis” are bonds issued by state or local governments or by government agencies. These bonds are typically riskier than national government bonds; cities don’t go bankrupt that often, but it can happens. For example, some years ago the city of Detroit declared bankruptcy and all bond holders loss BILLIONS of dollars. Back in the 1970 the city of New York City almost nearly declared bankruptcy as well. So thought municipal bonds are safer than Corporate bonds they are risker than federal issued bonds.
The other major issuer of bonds are corporations, and corporate bonds make up a large portion of the overall bond market. Large corporations have a great deal of flexibility as to how much debt they can issue: the limit is generally whatever the market will bear. Short-term bonds from corporation are labeled as such if they are under five years. They are then labels intermediate if they go five to twelve years and long term if over twelve years. Corporate bonds are characterized by higher yields than government securities because there is a higher risk of a company defaulting than a government. The upside is that they can also be the most rewarding fixed-income investments because of the risk the investor must take on, where higher credit companies that are more likely to pay back their obligations will carry a relatively lower interest rate than riskier borrowers.
In closing, bonds are both a preservation tool for capital appreciation already obtain then other investment vehicles. But if you choose the more risker bonds like “Munis” or the even risker corporate bonds you can also get some capital appreciation as well if you’re willing to take the risk. Whatever the case bonds should definitely be in your investment strategy. Stay tune for the next part of this series coming soon.
Jamaal W Vetose
Todd Capital Investment