As with every investment decision you make, you have to link the debate back to your investment objectives. To ensure that a bond is good, it has to be aligned to your investment objectives. Generally, when an investor wants to dabble in bonds, he/she is most likely to be investing with the future in mind. This is where a few good investing principles will kick into gear and help you make some important decisions. This chapter will reveal some basic things to look out for in a generic good bond.
1. Yield-To-Maturity – If you are looking to park your money in bonds and earn recurring income in the long run, you might want to adopt the “buy and hold” strategy. Always remember that whenever you buy bonds, your interest rate for that specific bond will be compared with the prevailing “risk-free” interest rates such as with treasury bonds. If your interest rate is higher than the risk-free rate, you might be required to pay a premium for the bond you wish to buy. This also means that at maturity, you will receive less money than what you have paid for. It is your duty to ensure that the extra interest rate you have made more than covers this amount. Always look at bonds with a reasonable interest rate.
2. Duration of Bond – Depending on your objectives, the duration of the bond will decide if the bond turns out to be a good, or mediocre investment for you. If you are looking to earn consistent recurring income without too much consideration of the bond value, you might want to look into longer-term bonds. Longer term bonds usually offer better yields than shorter term ones. Of course, longer term bonds will subject you to greater chance of interest rate fluctuation risk, but your overall interest rate will not be impacted. On the other hand, you can also invest in high-yield bonds if you wish to undertake more risk and earn a higher interest rate, these bonds typically have a shorter term.
3. Diversification – Another criteria for choosing a good bond is by determining if it adds value to your investment portfolio. Bonds play an important role in helping you smooth out the swings brought about by market volatility. If you are looking to bring in some conservative investments into the portfolio, you might wish to consider using treasury bonds as one of your asset classes.
4. Credit Rating – Bond credit represents the credit worthiness of the organization offering the bond. Typically, it is used to evaluate or gauge the financial health of the organization and determine the likelihood of the debt being returned to investors. The best rating that any group can receive is AAA. This means that the likelihood of default is very low, when you purchase bonds, it is important to take this into account.