It is essential to have a prerequisite understanding of retirement bond funds to know whether these plans are right for your retirement or not. Here are a few points to keep in mind:
Different between bonds and stocks
While buying bonds, you are partly an owner of the company or a stockholder. You are the owner of equity in the company. Owing to this, the stocks come to be known as equities. While purchasing retirement bond funds, you are lending money to the government or company who ha issued the bond in lieu of going to the bank to borrow money. Bonds are thus considered to be debt instruments. They are similar to IOUs.
When a company gives a consideration to high-risk outfits, the bonds are referred to as Junk bonds.
The Federal Government of the United States has issued a wide number of bonds in addition to T-bills. T-bills are considered to be another type of bond.
Why bonds are beneficial
As a bond is a kind of loan, the specific financial corporation or Government pays the interest on the loan. The payment of the interest comes to be known as a coupon. Zero coupon bonds are worth mentioning in this aspect as they do not pay interest payments while going. They, however, pay the same at the end of the term of the bond. Investors have gained high prominence for purchasing zero coupon bonds at exclusive discounts from face value. Face value is recognized to be the worth of the bond as it becomes due or matures.
With the maturity of zero coupon bond, the investor will be procuring a lump sum which is equivalent to his initial investment along with the interest. The bond was purchased at reduced face values. Local and state governments are also known for issuing bonds. They assist in building some government building or school in a specific area. Those who are planning to purchase the retirement bond funds lend money to the specific project.