Finance 2 weeks ago Last updated November 11th, 2018 94 Reads share

Types of Debt Instruments and Why Should You Invest in Them?

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In a volatile world, it is the responsibility of every individual to secure himself and his family in financial terms. In the financial world, there are many instruments created for a retail investor to invest. Some instruments have high-interest rates of return, and hence such devices are riskier than the ones with a lower. But a fixed rate of interest. Depending on one’s risk appetite, one can choose from an array of investment avenues.

If you are looking to deposit your money in a savings account of a nearby bank, then that is an idle option if you want easy access to your money. You can keep accumulating your funds in such an account. What is more attractive is that you can also insure such accounts. However, the rate of return on such savings is pretty low, owing to the higher degree of safety associated with it. On the other hand, a certificate of deposit has a higher rate of interest, and the price only increases with an increasing tenure. In this case, just a certain amount is insured, and you can get penalized for withdrawing money before the scheduled maturity date. If you want your money to earn a higher rate of interest than a savings bank account, yet be a safe option and allow easy access to your money, then money market deposit accounts are your answer. However, there is a limit on the number of withdrawals for any given period. Investing in stocks is equivalent to investing in the assets of a company.

The extent of investment in shares reflects the degree of ownership in the company. Therefore, your returns on the investment are directly related to the company’s performance for a given period. If the company has performed well in a year, then you can expect higher returns, and in cases of poor performance, the value of the stock falls, and so does the worth of your investment. Again, some funds are professionally managed, known as mutual funds. In this case, the manager of your fund will invest your money in a variety of avenues such as stocks, bonds, money market instruments, and so on. This way your returns are insured against any volatility, as one risky apparatus can get offset by a lesser dangerous instrument, thereby giving a steady rate of return on an average.

Government bonds

The government issues a bond or a certificate of debt. The bond promises a return of a specific amount on a set date. Such instruments carry a specific rate of interest, and the tenure of such bonds can vary from a few months to decades. Bonds are often deemed to be the safest financial instrument as they have a fixed income associated with it. Moreover, bondholders are always prioritized than the stockholders as bondholders are creditors of a company. There are also agencies that rate a particular bond instrument in terms of probability default. There are debt funds, or in other words, mutual funds that invest in debt instruments such as treasury bills and bonds. Such debt funds are preferred by those people who don’t want to take much risk when it comes to investing and therefore, prefer getting a fixed but lower return on investment. Also, this is a better alternative for those who do not want to go for the volatile equity markets and prefer staying safe from the high volatility of capital and money market.

 

Among the various advantages that a debt fund offers, the one that tops the list is that it is a source of regular income. If you are someone who is looking for a steady income, then debt instruments are your answer. They have an anticipated return, which assists in better financial planning. There are minimal risks with these instruments, so it makes them even more attractive for any investor. If the rate of return sufficiently covers the inflation rate of the concerned country, then such instruments are an ideal option of investment. Also, in cases of emergency, you have the opportunity to redeem them at will, hence providing you with liquidity. Lastly, such instruments are an excellent addition of a well-diversified portfolio, as it stabilizes the overall rate of return of the portfolio.

Let’s look at types of debt instruments:

  • Corporate Bonds:

    Corporate entities issue these and promise an annual or a semi-annual fixed return. The return gets calculated on the face value of the bond, and the rates are dependent on the creditworthiness of the issuing company.

  • Municipal Bonds:

    Issued by the state or municipalities, these bonds are meant to finance projects or meet other financial obligations. Many of such bonds are exempt from federal income taxes or local and state taxes.

  • S. Treasury Bills, Bonds, and Notes:

    Backed by the U.S. Government, these instruments are considered to be the safest in the world. With varying duration, these instruments are backed by the debt paying capacity of the Government. The interest rates on these instruments are pretty low, considering the extent of risk associated.

  • Packaged debt securities:

    In this case, various individual debts are pooled together but sold as single debt security.

 

  • Commercial paper:

    Corporations to finance their short-term obligations, issue these instruments. They are sold at a discount, and then it matures to its face value. They are more popular among mutual funds than retail investors.

 

There are millions of people all over the world with some extent of the debt. Investing wisely in the available and suitable financial instruments can save one from completely drowning during times of economic crisis. Income from investments may not help in paying off the debts completely, but it sure helps one in sailing through bad times, as an investment wisely done acts as fixed and constant support for the survival. National Debt Relief Company assists individuals in reducing debts via negotiation and various settlement procedures, helping you navigate through your bad times. So, invest wisely and carefully!

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Marina Thomas

Marina Thomas

Marina Thomas is a marketing and communication expert. She also serves as content developer with many years of experience. She helps clients in long term wealth plans. She has previously covered an extensive range of topics in her posts, including business debt consolidation and start-ups.

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