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What are Bonds?

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An important tool in financial planning is Bonds. On the first pretext, based on reference made in websites as well as other sources of study material compiled by leading authors, bonds refers to as “A kind of loan or debt security issued by an issuer of debt to holder on pretext of returning/repaying of the debts accumulated with interest when loan matures”.  Thus it includes three main components:

A Issuer/borrower who acts as principle debtor, lender or holder of bond acting as creditor and interest copy. The bonds are issued through underwriting. The bonds are usually purchased in bulk by more than one bank or financial bodies and then re-sold to investors. However Government bonds are sold as per auctioning them in full public view. The advantages and disadvantages of the Bonds are as discussed below:

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  • The biggest advantage of Bonds over other kinds of investment tools is that of security and safer for investing the money in as it gives a reasonable amount of returns.
  • They can be purchased at lowest of rates and can be resold also in bulk thereby creating liquid reserves and unlike other tools like equity shares.
  • Bonds provide good rate of return when matured and the amount to be provided can be a fixed rate.
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Having discussed regard the positive outcomes let us now discuss the drawbacks associated with bonds. They are:

  1. Subjected to a number of risks which includes any kind of events, prepay risk, highly volatility of market, inflation, etc thus making it a very dangerous and risky affair of investment.
  2. Susceptible to a good returns at times, but at same time in case the company is under loss or any issue resulted due to events like natural calamities or others can lead to an investor losing out all his precious money in vain, thus making it extremely volatile.
  3. No guaranteed income or returns as against other financial tools as it depends highly on market and also interest rates, thereby resulting in investor being forced to look new plan and not being provided with best deal to still remain on trade with companies. Thus indirectly it takes a toll on company’s reputation and branding.
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Last but not the least, this goes out to all the investors and in wake with interest to protect their earnings if they are interested in investing in bonds. Well at the time of issue of the bond, the interest rate and other conditions of the bond will be influenced by variety of factors, such as current market interest rates, the length of the term and the creditworthiness of the issuer. So if they approach maturity, bond price can move up, at this time issuer can redeem bond.

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