What are they and how to invest in bonds?

Main types of bonds

• Treasury Bonds: Issued by the US Government, they are considered the safest on the market as they are backed by the full faith of the government. While they offer lower interest rates compared to corporate bonds, they are exempt from state and local taxes. They are ideal for those seeking to preserve capital.

• Corporate bonds: Private companies issue them to finance projects such as expansions or research. Although they offer higher yields than government bonds, they carry greater credit risk and the interest generated is subject to taxes.

• Municipal bonds: These bonds, issued by local governments, finance public works such as schools and roads. One of its main advantages is that the interest is exempt from federal and, in some cases, state taxes. There are two types:

  • General liability: backed by municipal income.
  • About income: associated with specific projects, such as highways.

• Junk bonds: Also known as “high yield”, they offer high returns due to their high risk of default. They are an option for investors with a high risk tolerance.

• Bond funds: They group together several types of bonds, diversifying the risk. Although they have administration fees, they are a good option for those seeking exposure to different markets.

Key Bonus Features

• Coupon: It is the interest paid by the bond, expressed as a percentage of the face value.
• Expiration date: It is when the issuer returns the capital to the investor.
• Credit rating: Indicator of the issuer’s solvency. Higher ratings (AAA) reflect lower risk.

Benefits of investing in bonds

• Capital preservation: Ideal for those seeking to protect the value of their investment against market volatility.
• Income generation: They offer periodic interest payments, providing a stable flow.
• Diversification: They complement a portfolio composed mainly of stocks, balancing risk.
• Community impact: Municipal bonds finance projects that improve local quality of life.

Risks associated with bonds

• Interest rate risk: When rates rise, bond prices fall, affecting their market value.
• Credit risk: Possibility that the issuer defaults on its payments.
• Inflation risk: If inflation exceeds the bond yield, purchasing power is lost.
• Liquidity risk: Difficulties in selling a bond in the secondary market.

Tips for investing in bonds

• Investigate credit score: Investing in trusted issuers reduces the risk of default.
• Diversify: Combining bonds from different issuers and terms minimizes risks.
• Consult an expert: Using specialized brokers or financial advisors helps you make informed decisions.