Bonds

What are Bonds?
Bonds are securities. Therefore, bonds are subject to Market Risk, Interest Rate Risk, and Credit Risk. BONDS are debt instruments issued by a corporation or by a government body to finance particular concerns, such as roads, bridges etc...When you buy a bond you are lending money to this corporation or government body, and you will receive interest on that loan. In general, people are said to buy Bonds
to balance the volatility of their individual portfolio, when they own a substantial amount of stock.

Historically and mathematically, BOND prices have risen when interest rates fall and vice versa. By committing to a BOND with a maturity date well out into the future, you are giving up the opportunity to place your money in higher yielding investments or savings products that could come along before the bond matures.

Your bond will pay interest through maturity. If you own bonds inside a mutual fund, you will receive interest payments from the mutual fund. However, what effect does fluctuating interest have on your bonds or bond portfolio?  

What happens when Interest Rates Go UP? When Interest Rates Go UP, BONDS GO DOWN! Now the opposite will happen if rates go down. What happens when Interest Rates Go DOWN? When Interest Rates Go DOWN, BONDS Go Up!

Because the market value of a BOND falls in a rising interest rate environment, BONDS ARE RISKY, like other investment alternatives. If you need money in an emergency situation, and interest rates have INCREASED, the value of your Bonds have DECREASED. That's market fluctuation!

This Safe Money that you thought was put safely aside in bonds is now worth substantially LESS than you thought. You may have invested $50,000, yet bond values have fallen and NOW it's worth only $40,000. Keep in mind that bonds are subject to default or credit risk. The point is that BONDS are securities and may not be as SAFE as people think. Just like stocks, they are subject to market fluctuation.

Also, the provisional income formula put into place by congress in 1983 dictates how much of your social security benefits are subject to taxes. It also dictates which savings or investment vehicles are included in the provisional income formula and which are excluded.

The net effect of the provisional income formula makes some financial products more advantageous than bonds. Consider that tax-deferred growth, within an annuity, does not count toward provisional income and can, therefore, reduce the taxes you pay on social security benefits. Investments in municipal bonds increases your provisional income and, by default, your taxes. By repositioning those bonds into a tax-deferred annuity, you may be able to avoid the additional tax on social security benefits. This may be a sound strategy if bonds, per the provisional income formula, cause you to pay more taxes on your social security benefits.

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.