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By Michael A. Gayed, CFA: "Stocks have reached a permanently high plateau." - Irving Fisher, just before the 1929 Crash The S&P 50 (NYSEARCA:SPY) and Treasuries (NYSEARCA:TENZ) closed August having one of their best months of 2014 respectively,...
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MIFA: 'Clean' pricing of MIFA bond as of tomorrow MIFA Mitteldeutsche Fahrradwerke AG / Key word(s): Bond 01.09.2014 15:43 Dissemination of a Corporate News, transmitted by DGAP - a service of EQS Group AG. The issuer / publisher is...
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BEIJING (dpa-AFX) - China eased rules governing bond issuance by local governments so as to make public project financing easier. Top lawmakers amended the budget law, allowing local governments to raise funds directly through bond issue to...
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Fund managers said the rising cost of housing - which accounts for as much as a third or more of various measures of inflation and is outpacing other consumer cost increases - has revived price pressure in the economy.
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The Monetary Authority of Singapore (MAS) today released a consultation paper proposing changes to facilitate bond offerings to retail investors. In line with this, the Singapore Exchange (SGX) today released a consultation paper on a proposed...
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Unexpected strength of bond market runs counter to expectations that the end of the Fed’s quantitative easing would pressure long-dated 10-year notes
The Hindu Business Line  9 hrs ago  Comment 
With Prime Minister Narendra Modi seeking greater investment flow from Japan into India, financial services giant Nippon Life Insurance today announced two dedicated funds in partnership with Anil...




 
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A bond is a type of debt. It's a loan from an investor to an institution, and in exchange the investor collects a predetermined interest rate. When a company needs capital to expand its business, it issues bonds to the public. Investors buy them with the understanding that they will collect the original principal plus interest when the bond matures at a set date. Federal, state, and municipal governments issue bonds for a similar purpose, to raise money for projects and public programs.


Types of Bonds

Bonds or Stocks?

Making the choice between stocks and bonds can be complex. In general, though, the key consideration is your own planning horizon.

Bonds are, in general, more predictable than stocks, and (on average and in general) give you lower returns. If you believe you'll need predictable access to money over, say, a 20-year period, you may be better off with bonds. For example, if you want to put aside a specific amount of money for a grandchild, expecting that money to be available for college in eighteen years, and not expecting to have other capital available. Insurance companies invest heavily in bonds for just this reason: it matches predictable liabilities (future insurance claims) against predictable cash flows (principal and interest).

Some bonds have tax advantages; for example, municipal bonds are typically exempt from state taxes in the state that issued them, as well as federal taxes. This can make them more attractive, though often you will find that the market has arbitraged away the difference, and that corporate (that is, taxable) bonds carry a higher gross yield -- and the same net yield after taxes. Although many investors invest in munis for just this reason -- they "don't like the taxman" -- they may not be making the optimum investment choice.

Bonds are not riskless, however. They carry credit risk ("will I get my money back?"), prepayment risk, liquidity risk and interest-rate risk. Many bonds give the bond issuer the right to repay the bond early -- which happens more often when rates are low, in other words, just when you don't want your money back. This is prepayment risk. Liquidity risk is the risk that you won't find a good price for your bond when you want to sell it -- because there are so many more bond issuers than stock issuers, and because bonds are not exchange-traded, there may not be a willing buyer. Interest-rate risk is the opposite of prepayment risk: when rates go up, the value of your bond will drop (it drops more, the further away it is from maturity). If your circumstances change and you need to sell the bond before maturity, you can lose capital that you would otherwise receive, if you held the bond to maturity.

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A how to on investing in bonds

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