One of the more contentious results of the present financial crisis that we find ourselves in is that interest rates on savings accounts have plummeted to as near to zero as makes very little difference. It is hardly surprising that many savers who have quite possibly relied on the income from their capital to supplement their pensions and give themselves a well earned comfortable retirement have seen their incomes slashed and are facing very serious lifestyle choices as a result. One method of increasing income is to move funds which are sat in the bank and invest them, but equities are looking very suspect as a medium-term investment and at a time when even some of the biggest businesses in the country as well as worldwide are looking very shaky indeed or have already gone broke a reluctance to invest in shares is very understandable. Many people who would never have considered purchasing bonds in the past are now thinking about it very seriously indeed.
At its simplest, a bond is a promissory note. You lend cash to a bank, company or other institution for an agreed period of time at an agreed interest rates and the bond is the security you get for the loan subject to all the terms and conditions. These bonds can then be traded on the market and the price that someone else would pay for one would depend upon several factors; just how secure the company or institution that issued it appears to be, how far off the redemption date is, and what the interest rate is. If you purchased the bond with a high interest rate and rates subsequently fell the bond would become more valuable because anyone buying a new one from the same issuer would probably only get one which paid a lower rate. Conversely, if interest rates shot up after you had bought the bond its value would be less because any potential purchaser would be better off buying a new bond at the new rate.
Municipal corporations often issue bonds in order to finance major capital works and these are generally recognized to be fairly secure and can come with tax advantages. The government also issues bonds and provided that the country itself does not go bankrupt; a number of countries have in fact done so over the last few decades; then they are highly secure and again can offer tax advantages.
Major corporations can sometimes issue bonds, but these are of course the riskiest of the lot because companies can and do occasionally fail and it has to be borne in mind that quite a few high profile companies have gone under even before the credit crunch, seemingly without anyone being aware that they were in financial difficulties despite the fact that their accounts were supposed to be regularly audited. As a consequence of the additional risk interest rates on these bonds tend to be higher.
There are then benefits to buying bonds rather than leaving money to moulder in a bank account but there are risks as well, and it is not at all impossible to find that seemingly rock solid investments can turn into total losses. Anyone purchasing bonds is therefore well advised to look very carefully into the stability of the issuer, and to seek out the most qualified professional advice, whilst bearing in mind that very many professionals never saw the current credit crunch coming.