Discounted Bonds: 3 Reasons Why They're Not As Great As They Sound
My oldprofessor clued me into a lesson about .
If a retailer offers aon a product on a regular , that's the real price. When you don't buy the same item on , you're paying an inflated price.
With, however, it gets a little more complicated. When I buy a shirt, I know how it's going to look on me and what pants I'll pair it with. I'll also probably wear it within a couple of weeks of the purchase date.
And that's just one reason to think twice about buying discounted bonds. There are other very good reasons. Here are three more:
1. That Discount May Not Be Much Of A Bargain.
Let's say you buy a bond with a $1,000 for $500 and the bond reaches maturity on June 30, 2023.
In other words, it take 10 years before you're guaranteed the $1,000. In the meantime, you don't have your $500.
The usual reason for a bond to be sold at a discount is the fixed interest rate is lower than what's being offered in the current market. The number of percentage points of difference varies widely. Think about your . You could score a 4.5% rate now, while 7% was considered a good deal just five years ago.
Compare the interest rate you're currently earning on other rate of return on $500, you'd have over $800 by the end of 10 years. So if you got a 50% deal on the bond, it would be worth it. If you bought a $1,000 bond for $750, the bond may not be worth in.. For instance, if you're averaging a 5% annual
2. If The Company Goes Away, Your
If you're buying a bond -- discounted or not -- be sure to think about the stability of the company whose bond you're buying. If you're purchasing a federal government bond, this isn't an . (After all, if the federal government went bankrupt, we'd all have bigger worries than one bond's stability.) But if you buy a , you have to count on the company being around when your bond hits maturity. If the company goes before your bond hits maturity, more than likely your bond , too.
If your bond matures in 10 to 15 years, that's a big prediction to make. It's a slightly easier decision if you bought the bond with less than five years until maturity.
3. Interest Rates Aren't The Only Reasons Bonds Are Discounted.
Sometimes the discount is due to the perceived risk of the company. A company that's issuing bonds that isn't in the best financial state couldbonds at a discount in order to get the money it needs, says Michael Eisenberg, and personal financial specialist.
A bond is simply aproduct for a specific number of years at a specific interest rate. It may be that if you're going to take the risk of buying a bond from a company that's shaky financially, you might be better off buying -- if the company succeeds, you could more , more quickly.
The corporate bonds are way too risky to invest in without help from a financial professional. And a financial professional can help you weigh the value of government bonds versus other investments over the time period until maturity.Answer: Discounted