Time is money, they say. In the investment world, every word of this statement is true. There are various alternatives for those with disposable income to invest their money and grow their generational wealth. A bond is one of them. A bond is money the government or company borrows from individuals. This loan issued to these entities attracts a fixed interest referred to as a coupon. Bonds are a low-risk investment, and that is why you need to have one or two depending on your financial muscle. This will cushion you big time during times of crisis and whenever inflation worsens. What else do you need to know about bonds?
What You Need to Know
When investing, it is proper to operate from the point of knowledge. That way, you also minimize your risks and tame over-ambition. It is one of the best ways to stay safe and secure your investments. So, there are two types of bond returns. Each of them comes with varying levels of risk.
According to history, most bonds earn returns averaging between 5% and 10%. It is essential to do proper research on how creditworthy the bond issuer is. Whether high or low, it is directly proportional to the risk of your bond. That is why you must insist on getting into business only with creditworthy issuers. A government is a relatively less risky issuer, although going for the highest return bonds dramatically increases your risks.
One of the most important questions investors want to know is the total amount they will get in return. In this case, you want to know how much $200 will earn you after 20 years. Remember this is a long-term investment and that means increased expected returns.
The coupon you receive depends on the coupon rate. We will use two coupon rates in this case, i.e. 5% and 10%. If you have 5% for your bond as the return rate, you will earn $10 a year for 20 Years. In essence, you’d have made $200 plus the $200 principal amount which will be paid back.
Say the rate of return is 10%. You will earn $20 per year for 20 years; this plus the principal amount of $200. Well, that’s if you manually calculate the rates. Alternatively, you could save yourself the stress to manually calculate the rate and click the following link for an automatic calculation.
All you are required to key in are the details of your bond, including:
- Bond price – which is $200 in this case
- Annual yield – this is the return rate. I used examples of 5% and 10% in the above examples.
- Years of maturity – this is the total number of years the bond will take to mature. In this case, it is 20 years.
- Compounding rate – you are also required to adjust the compounding rate according to the terms of your bond. Whether it is annually, semi-annually, etc., you must adjust that field to ensure you get the right numbers.
After filling the above thoroughly, the calculator will bring the result. Remember if you leave some fields empty, the results may not come out. There’s an option to reset the values and adjust in case you want to find out possible returns for bonds of other amounts or coupons with varying terms.
What Type of Bonds Can You Get with $200?
Now that we know how to get the possible returns $200 can earn, it is essential to know what types of bonds $200 can get you. Read on.
U.S. Treasury Bonds
If you want safe bonds, then U.S. treasury bonds are the one. $200 may not be so much an amount to others but is such a significant amount to lose. That is why you want it all back plus a significant amount of gain on top. The U.S. treasury bond guarantees this. This might be the best option, especially if you want to invest for the long term. Most treasury bonds are issued for 20 years, 30 years and so on. With $200, you will get proper returns if you invest in this.
Some bonds are better for the short term. That means lesser returns. Besides, their risks vary depending on a lot of factors. U.S. treasury bonds rank better. This is true, especially if you have a relatively small amount of money to invest. $200 is just a perfect amount to invest in U.S. treasury bonds.
These are bonds offered by companies in need of capital. Contrary to the guaranteed U.S. treasury bonds, the risk in these kinds of bonds is higher. Unlike shares and stocks, bonds do not give an individual any rights to ownership of the company. This is only a reserve of stocks, although stocks come with very high rates.
If you have $200 for investment, you want to take care of every dollar. You only want to put the money in an investment with a guaranteed return. Corporate bonds are only a good option if you are sure the money will come back. With the rising inflation rates, it is almost impossible to determine a company’s ability to be a going concern for 20 years and beyond.
There are more types of bonds, but these two aforementioned are the better options. If it were me, I’d go for the U.S. Treasury bond. It is safe and with a guarantee of return. The government will always pay back its loans to its citizens.
The Bottom Line
$200 is a fair amount to invest in bonds. This article has shared the amount of return you stand to earn with such an amount as well as an automatic calculator you can use to get your coupon rate. But I understand there could be many other aspects you would want to learn about bonds and investments. Why can’t you click here for more information?