Advantages/Disadvantages Advantages of bonds Bonds as an investment instrument bring a lot of advantages to the bond holders. Firstly, bonds are more stable than stocks. Investing in bonds involve lower risks compared to stocks. Normally, bond holders are more likely to receive the coupon rate (interest) from bond issuers. So, there is very less chances that bond holders will lost out on their investment. Also, they can feel relieved when they invest in the reliable investment and taking less risk to loss all their money they invest. Besides, bonds are predictable.
On the maturity date, bonds are returned to bond issuers in the form of fixed periodic interest and principal amount of the bonds . Bond holders can know how much coupon rate (interest) , how often will receive it and when the value will be repaid (matures) when they purchase the bonds . The interest rate given by bonds are typically higher than the interest rate paid by banks on saving account. Basically, bond holders receive more interest than account holders . This means bonds will give the greatest return without posing too much risk. Moreover, certain bonds can be exempted from the income tax such as municipal bonds.
So, the interest earn from the municipal bonds can be the investors’ profit without any tax on it. Investors who pay high taxes can take advantage of tax exempt bonds. Many municipal bonds are free of state taxes. Some of are also exempt from federal taxes. This is an additional incentive to invest in bonds since lower taxes result in larger gains. Other than that, bonds do not need constant monitoring like some investment instruments. Unlike margin, the investors need to check the price, status, news from time to time and this make a tension life to them.
The bond fund managers who were expecting continued income from those bonds may suddenly be forced to buy other bonds that don’t pay as well. Besides that, long-term bonds can fall in value with fluctuating interest rates. This lowers the value of bonds and tied money of bondholders. If an investor’s money is tied up in some low yielding long term bonds and suddenly the interest rates of banks or other bonds go up, there is nothing much the investor can do about the situation. In such case, an investor will end up making much lesser money as he could have, if he had invested in other instruments.