A bond is an investment instrument with a fixed rate of return over a definite period, the maturity of which, the issuer of the bond repays the principal (face value). Unlike stocks or shares, bonds have predictable returns and repayment amounts, and they are less affected by market volatility. They are more preferred investment options to raise capital, receive periodic income, or act as a saving strategy. There are several types of bonds that include corporate bonds, government bonds, municipal bonds among others, all of which differ on the level of risk and return. Before investing in bonds various factors should be considered to derive the highest benefit based on personal investment objectives.
Firstly, the maturity of the bond is important and it may be short-term, medium-term, or long term. Depending on the investment goal (for example, long-term asset acquisition), the maturity time will influence the investment decision. In addition, the returns and risks are more or less based on the maturity of the bond.
The second factor is the interest rate. Although most bonds carry a fixed rate of interest, some bonds have a floating rate that involves payment of interest at maturity. The periodic payment of interest (which may be monthly, semi-annually, or annually) is more appealing to investors as it guarantees regular income that can be useful in meeting short-term obligations or expenses, thus becoming an influential factor in bonds investment.
Thirdly, the redemption features of the bonds are important, especially the call provision where the investor is required to call back his/her investment before the maturity date. Where call provision is available, ‘yield to call’ and ‘yield to maturity are important elements of the provision that promise higher annual returns that compensate for early call risk.
The fourth factor is the tax status of the bond. Some bonds are taxable while some are not. For instance, corporate bonds, mortgage-backed bonds, and some government-sponsored bonds are taxable while municipal bonds are tax-exempt. Although tax procedures vary depending on the country of issue, tax consideration is important in making a bonds investment decision.
An insurance policy is a contractual obligation that binds an insurance company and the insured/policyholder the terms and conditions of which are contained therein. In reading the insurance policy, four key areas need to be reviewed.
First, the type of policy is critical. This will indicate whether the insurance policy delivered is actually what was contracted. In addition, the specification of the policy is important since one insurance policy may be of different types; for example, a life policy may be terminated, universal, or whole life.
Secondly, the policy number is important as it will ensure the identity of the policyholder. It is the reference point in case of any communication with the insurance company. Where there is a misstatement in policy number, the validity of the policy is jeopardized.
The third area is the date of the policy. This is important as it will indicate the date the insurance policy commenced, especially when it comes to a life policy. This is because different varieties of life policies have different features attached to them. For example, the policy date will help to determine the expiry date of a term life policy.
The premium amount and the frequency of payment should also be reviewed. This is important to keep track of the policy payment, especially where payments are made monthly, quarterly, or annually. It is advisable to place a standing order for automatic deductions every time the premium falls due.