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Understanding Bonds

A bond is a loan issued by the government or a company. These bonds are offered to citizens for purchase, and the government/corporation uses this money to aid their spending on other ventures. Bonds are a more secure method of investment and have interest payouts over a certain time period. However, they likely have a lower return than other methods such as stocks. They compensate through the lower risk, which may be ideal for some investors. Bonds are also a very long-term investment. They can last for a fixed period, such as 20-30 years.

Bonds have a feature in which they reach “maturity.” They are issued at a certain value when sold, which can be $100, $1,000, etc. This initial value that is paid for will be returned to the purchaser after the time frame of the bond. For instance, if you purchase a $100 bond that lasts 10 years, you will get $100 at the end of the period. So how is this investment beneficial? Not only will you get your initial money back, but the issuer of the bond pays you interest for borrowing your money. There are interest rate payouts throughout the set time period, which can be annually or twice a year depending on the bond. (Keep in mind that these interest rates may be on the lower side and offer less return than other investments.) The issuer of the bond pays this interest at usually a fixed rate until the final maturation date. This is when the purchaser receives the initial value of the bond, and the bond ends. There is also the possibility of reselling the bond before maturation to get more profit, but that is more situational.

So, what are the downsides? As mentioned earlier, the interest rates can be on the lower side and produce lower returns than other investments. Issuers of bonds can “default”, or fail to pay the purchaser a scheduled payment. This can happen when the issuer faces economic problems, such as excessive debt. When this happens, the outcome of your payments is very unpredictable. Therefore, it is important to do background research on bonds to purchase and consider the ability of an issuer to payout long-term; the S&P is a good place to start. Bonds that have higher interest may have higher risks of defaulting. It is important to remember that the safest bonds in the world are issued by the United States government itself; if you are considering the purchase of a bond, look toward the government and major companies more.

Why consider buying bonds as a teen? Your main options to put your money in include savings accounts, stocks, and bonds. Each method has its own risks and benefits. Bonds are generally a very safe, long-term investment compared to the other two. It is important that you diversify your investments! It is recommended that you do not go all out on one type of investment, as you can take advantage of the differing benefits, and also avoid all the risks of one type. While stocks are the more beneficial investment for higher returns over time, bonds can be a potential safe investment that provides a predictable income from investment payouts.

U.S. Government Bonds

If you are going to consider purchasing a bond, it is the safest route to purchase a U.S. issued bond. This bond comes directly from one of the largest economies in the world, and will be the closest thing to a risk-free bond.

One option is the Series EE U.S. Savings Bond. This bond promises a fixed interest rate over 20 years. However, you only pay half of the “face value,” or initial bond value. For instance, you only pay $50 for an $100 bond; you will also receive $100 once the bond reaches maturity along with the interest payouts, not just $50. You can then cash this bond in after a year.

Another option is the I Savings Bond. The key feature of this bond is that it does not have a fixed interest rate; the rate is constantly adjusted based on the inflation rate. This protects the bond interest payouts from fluctuating inflation.

You can purchase bonds from the government directly online on the TreasuryDirect site.

Overall, bonds may not be your first choice of investment as a teen. It is a long-term investment, and will not benefit you right away. However, it is important to understand what a bond is. It also guarantees that you get your money back with additional profit; a feature few other investments over. What you do with your money is up to you, and this is just one of the many choices you have. Do your own research before you invest and think about what will be the best for you!

Written by Brian Caballo

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