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Why You Need Bonds To Secure Your Financial Freedom!

April 18, 2012 | Comments: 0 | Views: 113

The world of investing includes many asset classes such as stocks, bonds andmutual funds, just to name three.While most people invest in stocks and mutual funds in order to secure their financial freedom, some of those investors tend to shy away from bond investing because they do not realize how important they are for improving the overall performance of their portfolio. Let's review the different bond offerings and why they play such an important part in the investing world and your financial freedom!

Treasury Bills,Treasury Notes and Treasury Bonds are some of the safest and most popular investments in the world. They are backed by the full faith and credit of the United States. No one expects the U.S. to go broke so consequently there is very little risk investing in these instruments.The chances of getting your initial investment back is pretty much 100%.If your portfolio contains any of these bonds, there is a very good chance that you have a good handle on securing your financial freedom.

TIPS, which stands for Treasury Inflation Protected Securities are 5, 10, or 20 year inflation indexed bonds tied to the consumer price index (C.P.I.). The interest payment is the same every six months but when multiplied by the C.P.I. you get inflation protection due to the increased payment.

Treasury Bills (T-bills) mature in 1 year or less, while Treasury Notes mature in 2 to 10 years. Then of course there are Treasury Bonds which mature in 20 to 30 years. They are know as the "long bond".To buy any of the above instruments without the added burden of a broker's commission, you can simply visit

Corporate bonds are exactly what the name says. When any corporation needs to raise cash for any number of reasons, they sell bonds through brokers. Theses securities tend to be riskier than treasury bonds but in return you can earn a higher rate of interest for your investment. The bond interest is fully taxable at the federal and state levels so you would want to consider the tax aspect of this security when deciding upon a purchase of corporate bonds

Municipal bonds or Muni's for short are bond securities issued by individual states and any of that state's political subdivisions. The money raised by the issuer is used for many projects that are classified as general obligations or revenue producing. They usually receive special tax treatment in that if you live in the state where you buy them, you will be rewarded with triple tax free status, meaning no federal tax, no state tax and no city tax. One other nice point about Muni's as everyone likes to call them....very often they come with insurance which further enhances their appeal of being secure. Muni's fit very well into a portfolio that seeks to garner current income which you get twice a year in the form of interest payments.

Zero's: In the early days when bonds were issued, you were given a coupon book. Once every six months you had to clip out a coupon and turn it in to get your bond interest payment which is the frequency when you receive your interest payments on bonds that you hold. Those were called bearer bonds, since the person turning in the coupon (the bearer) was the apparent owner of the bond. Then about 1982 bonds started to be registered electronically and no more coupons were issued nor needed in order to be redeemed to get your interest payment. Since there are no more coupons ( The current bearer bonds should all be gone by 2013), the term zero arose as in zero coupon bond. Today Zero's as they are called usually refers to a bond, (corporate or treasury) that is bought at a discount from face value and pays no interest until maturity at which time it pays the face value back. This is when you receive all the accrued interest and your initial purchase price, so you as the bond holder will be made whole.

If you have a well balanced portfolio, it would include some stocks, possibly some mutual funds and very often some of the aforementioned bonds. The single biggest reason for holding bonds in your portfolio is the fact that different asset classes perform differently over time and in response to changing world events. Another way to say this is that very often, when stocks are trending downward, bonds are trending upward. Your ultimate financial freedom will be secured by such an asset allocation across these different securities so start investing early and be sure to diversify.

Chris Borg is a practicing pharmacist and financial adviser who writes about health care and investing. Chris's latest website on financial freedom is at RatraceBgone, where Chris provides financial tips such as the 9 steps to financial freedom: 9 Steps To Financial Freedom

Source: EzineArticles
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