Advantages & Disadvantages of Investing in Bonds

Risk

• While returning a higher interest rate than most savings accounts, bonds are also a very safe investment and, depending on from whom they are purchased, carry little to no risk. Bonds purchased from the U.S. government are considered to be "risk free" by most financial advisers. Even if a private company that issues bonds goes bankrupt, as a creditor a bond holder would have first priority in receiving cash from assets that the company had left.
  
  

Dependability

• Unlike stocks, which fluctuate widely in value depending on unpredictable factors, an investor in a bond will be able to rely on a predictable earnings rate from any bond issued by a still creditable entity. This makes bonds ideal for retirees and those on a fixed income who will need to rely on regular payments to meet ends. The gains on investment offered by bonds are low as compared with stocks but more dependable.
  
  

Bankruptcy

• Bonds are not completely risk free. While it is true that a bond holder will receive first priority for payment as a creditor, it is possible for a company to so badly manage its affairs that there are not assets enough left to pay even its bond holders when it declares bankruptcy. Unlike a bank account, which is insured by the federal government up to a certain amount, there are no guaranties on private bonds.
  
  

Interest Rates

• Bond prices are directly related to interest rates, which change over time. When interest rates rise, bond prices fall. This will make no difference to the investor who intends to hold onto a bond for the full length of its term until it expires. If the bond holder at any point wishes to sell her bond before its expiration, however, current interest rates will make a large difference to the return she receives on investment.
  
  

Taxes

• It is possible to purchase tax-free bonds. Though these usually give a lower immediate return to investors, they may be considerably more valuable after taxes are considered. This is especially true for those investors who are in a higher income bracket and so subject to high tax rates. Tax-free bonds are ideal in that they are protected from changes in a government's tax policies as well as changes in a person's earning bracket.