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How to Build a Portfolio with Bonds

By Charles Hopkins Published 09/19/2006 | Entrepreneur

A bond is a financial instrument that corresponds to debt securities. A bond certificate attests that the issuer, usually the government or a company, is indebted with the holder of said certificate. These entities are then obliged to pay the amount back and that translates to the entire principal and all the interest accrued thereupon.

Bonds can be an alternative to the highly volatile stock market. Stocks are more inclined with long-term growth and bonds give all the needed stability. To educate yourself on how to build a portfolio of bonds, as well as, the essential things surrounding it please continue reading below:

1. Know the basics of a bond. The moment you buy a bond, you are entitled to collect all due interests from it until after the bond expires. On the maturity date of the bond, its respective holders will be entitled to receive the full value of the bond.

2. There are different types of bonds to consider. There are treasury bonds, municipal bonds and corporate bonds. Treasury bonds are the ones issued out by the national government. The local government, on the other hand, issues municipal bonds. Corporate bonds are those given out by companies and are not backed by any of the government divisions at all. Of these three, the corporate bonds are the most capricious.

3. Understand all the underlying risks. Bonds may relatively be safe, but not in its totality. There are still different risks to consider. First, there is an inflation risk. An inflation risk is a definite risk. It happens when the inflation rate of the country rises, as it could impact the bonds having the longest maturity period. Bonds are dependent on the prevailing interest rates. When interest rates go down the payout is lower too. And that's what you call an interest rate risk. Another risk, the market risk, corresponds to the supply and demand of a particular bond. The higher the demand, the higher its value. The basic laws of demand and supply are followed. 

4. Know the right places to buy bonds. If you intend to purchase government bonds, you can contact the U.S. Treasury directly. There are also a lot of brokers around, both online and offline. You can get in touch with them and make a deal.

5. Be informed of the ins and outs of acquiring a bond. There are legalities and other things to consider before you go ahead and purchase a bond. There are also something called bond mutual funds, which are advisable for people who would like to get bonds but do not want to go through the hassles of dealing, selling and buying some themselves.

Bonds are a good complement of stocks. Maintaining either a good portfolio of stocks or bonds alone is good enough. But a combination of the two is always better. Bonds tend to add balance to the portfolio mainly due to their steady quality. It is just a matter of determining a good mix of the two.