Bond Investing: Navigating Short, Intermediate, and Long-Term Options
Bond investors face a range of choices, from short-term to long-term options, each with its own risks and rewards. Here's a breakdown of different bond types and their characteristics.
Short-term bonds, maturing within a year, provide lower interest rates but have less interest rate risk. Their prices are less affected by market fluctuations. At the other end of the spectrum, long-term bonds, maturing in 10 years or more, offer higher rates but are more vulnerable to interest rate changes. Intermediate-term bonds, maturing in 2 to 10 years, balance risk and reward with moderate rates and sensitivity to interest rate changes.
Bond maturity is the date when the principal amount, or face value, is repaid. For perpetual bonds, like those issued in Germany, there's no specific maturity date. Instead, they're often used by companies to raise capital without a set repayment schedule.
Understanding bond terms like maturity, tenor, and principal amount is crucial for investors. Carefully considering the term to maturity and interest rate risk can help investors make informed decisions tailored to their risk tolerance and investment goals.
