Making Cents: “Not that kind of bondage”

Mathew Carrick / Columnist

Investing advice usually comes in two forms: stocks and bonds. Bonds are a low-risk, long-term investments that typically yield a very low rate of return. In other words, you won’t get a lot out, but you probably won’t lose anything either. Bonds are suitable for people who don’t like to take risks or those who will need invested money back at a certain time.

So what is a bond? In contrast to a stock, which actually gives ownership or stake in a company, bonds are debt. When UAF wants to build a new building, the university might issue bonds—essentially, take out a loan. Individuals and groups buy these bonds, giving the university the funds now with the promise of getting more money later. These bonds come in many varieties (or, as I like to call them, shades of green). They can be issued by governments local and federal, public institutions, corporations and nearly any other organization. There are also a great many technical kinds of bonds, the likes of which you would learn about in a finance course but are out of the depth of a personal finance column.

So, where would you buy bonds? As with most any kind of investment, bonds can be purchased through a brokerage account like Scottrade or Charles Schwab. Another popular way to purchase bonds is through the United States Treasury, which offers federal government bonds through their website. Treasury bonds are a great way to get started, as they are extremely low-risk because they are backed by the full financial authority of the United States government. However, because of this low risk, Treasury bonds also yield a very low return: in other words, don’t expect to get rich with them. Bonds can be issued for almost any length of time, ranging from a few weeks to a few decades, with longer time horizons coming with greater annual returns.

In many cases, the yield of a bond (especially low-risk government bonds) does not exceed the inflation rate, meaning that an investment in bonds will still lose money. Of course, this is still better than the extremely low interest rates offered in a bank account, meaning you’ll lose less money than you would keeping money in a bank or under your mattress. For this reason, bonds are less about building wealth than about preserving wealth, making them more commonly used later in life. They’re still relevant for young investors as a safer, easier alternative to the stock market. If you’d like to invest but are wary of volatility in the stock market or need something that you can cash in at a specified time, consider bonds!

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