Can you answer Jeet’s question about Bonds?:

Risk premiums on corporate bonds are usually anti cyclical that is, they decrease during business cycle expansions and increase during recessions.

High Yield Corporate Bonds

For any financial plan, bonds are the core element to invest and grow wealth. It can be defined as a debt security. When you purchase a bond, you are lending money to an issuer such as government, municipality, corporation, federal agency or other entity. In return for that, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the face value of the bond when it “matures,” or comes due. It is best to invest in bonds because one will get a predictable stream of payments and repayment of principal, with interest.

There are different types of bonds for you to choose. It includes municipal bonds, corporate bonds, mortage-backed bonds, surety bonds etc.Surety bond is an agreement among three parties the principal, oblige and surety. In construction companies surety bonds are frequently used. A key term in nearly every surety bond is the penal sum, and it is specified amount of money which is the maximum amount that the surety will be required to pay in the event of the principal’s default. This allows the surety to assess the risk involved in giving the bond; and the premium charged is determined accordingly. If the principal defaults and the surety turn out to be insolvent, the purpose of the bond is rendered futile. The principal will pay a premium in exchange for the bonding company’s financial strength inorder to extend surety credit. In the event of a claim, the surety will investigate it and if it turns out to be a valid claim, the surety will pay it and then turn to the principal for reimbursement of the amount paid on the claim and any legal fees incurred. There are mainly two categories of bond types: contract bonds and commercial bonds. Contract bonds guarantee a specific contract and it includes performance, bid, supply, maintenance and subdivision bonds. Commercial bonds guarantee per the terms of the bond form and examples are license & permit, union bonds, etc.

A surety bond issued by an insurance company to guarantee satisfactory completion of a project by a contractor is performance bond. Many performance bonds give the surety three choices they are; completing the contract itself through a completion contractor ; selecting a new contractor to contract directly with the owner; or allowing the owner to complete the work with the surety paying the costs.

A bid bond guarantees the owner that the principal will honor its bid if awarded the contract. If the principal refuses to honor its bid, the principal and surety are liable on the bond for any additional costs that the owner incurs in reletting the contract. The penal sum of a bid bond is often ten to twenty percent of the bid amount. In the case of payment bonds it gives guarantee to the owner that subcontractors and suppliers will be paid the monies that they are due from the principal.

If you need a good return in your requirements for any of your needs then the best investment is in bonds.



Thanks to Ron Victor for contributing this article to our Bonds blog:

Tax Free Municipal Bonds

Can you answer Robert R’s question about Bonds?:

How risky are corporate bonds with an A rating? (As opposed to AAA and AA).

What are the typical chances that an A rated bond will default?

Tax Free Municipal Bonds

Can you answer SOUTH LAKE’s question about Bonds?:

If a bond matures in 2 years and has a coupon of 6 %
and costs $90 does that mean I can earn 6 % annually plus another 10 % if I hold until maturity ?

What are the risks ?

High Yield Corporate Bonds

Can you answer sonwitch106’s question about Bonds?:

Once you buy a corporate bond, can the interest be lowered or be canceled?

Tax Free Government Bonds