Need a Safe Way to Invest, Try Bonds!

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Investing for the future does not always mean buying stocks. There are other less risky ways to invest and earn money for your future. Bonds provide a good way to plan ahead without the risk of the ever fluctuating stock market.

Bonds are basically a loan that you make to the bond issuer. As an investor you purchase the bond thereby loaning money to the bond issuer in return you earn interest until the bond reaches its maturity. In very simple terms, you loan the issuer $5,000 for a period of 10 years. Over that 10 year time frame you will collect interest on that initial amount. After the 10 years, the issuer will then pay you back the full $5,000 on top of all of the interest paid to you throughout the 10 years. Pretty safe investment, wouldn’t you say?

There are different types of bonds and many different categories of issuers. The most commonly known are government bonds. The U.S. Treasury issues bonds in order to pay for activities and to use toward the national debt. In this case, you would purchase a bond and receive interest just as explained above. These bonds are completely tax exempt from state and local taxes. The interest is lower on these types of bonds but the risk is almost non-existent.

There are Agency Bonds that are also issued by the U.S. Government. These bonds are used to for government sponsored enterprises such as Fannie Mae and Freddie Mac. The interest paid on these bonds is a bit higher than the Treasury bonds, but some of these are in fact taxable. However, again the risk is extremely low.

You can also purchase Municipal bonds. These are offered by states, cities and towns to pay for public projects. The majority of these bonds are exempt from federal, state and local taxes.

Corporations issue bonds as well. They use the money to expand or cover expenses. Generally the interest is much higher but the risk also increases. These bonds are also completely taxable.

Some bonds pay interest semiannually, while others pay annually. You can also find bonds that will pay you interest monthly if you so desire.

Zero-Coupon bonds are a bit different in that they pay only at maturity. So if you buy a bond for $12,000 and its maturity is in 10 years, you will receive your initial investment of $12,000 and all of the accumulating interest for the past 10 years at the same time. Using 6% as the interest rate at the time of purchase you would receive $12,000 plus $7,200 upon the maturity date. The thing to remember here is if the bond is taxable, you will still have to pay taxes on the interest each year even though you won’t receive it until the bond’s maturation date.

It is always a good idea to contact a tax professional when you decide to start investing in bonds or stocks or any other type of investment that will pay interest or dividends. You want to make sure you understand the tax implications before you choose your investment path.