What are the advantages of investing in bonds?

The main advantages of investing in bonds are various, they are:-

1. Income generation: the bond issuers are obliged to pay regular interest to the bond holders. Generally, the interest offered to bond holders are higher than fixed deposit rate because of the risk involved. Hence, bond investments provide regular income stream to the bond holder. For example, if the coupon rate of the bond is 7%, it means that the bond holders will receive 7% interest every year until maturity date. Unlike stock investment, the annual dividend rate is unknown and subject to the company’s performance. The bond interest is fixed.
2. Potential capital gain: bond prices fluctuate before the maturity date. If the bond price increases during the bond tenure, the bond holders can choose to sell the bond to another party through secondary market and have capital gain. However, the liquidity of the bond is generally lower because there is not much demand of bond because bonds are not available to the mass market but only to sophisticated investors.
3. Generally safer investment instrument: this is particularly true for government issued bond because the bonds issued are guaranteed by the government. However, the interest given will be slightly lower than the corporate bond. It is still slightly higher than fixed deposits.
4. Diversification for equities investments: Bond is served as a diversification investment tool as bond has no relationship to stock market. Hence, it does not move in tandem with the stock market. When stock market is moving downwards, bond is usually more stable and hence it reduces the investment risk within an investment portfolio.
5. Stability: As long as the bond holders hold the bond paper until maturity date (save that the company stays solvent), the bond holders will get back the principal amount invested (par value of the bond). The return of the bond investment is hence easily predicted.

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