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Fixed Income Bonds

Fixed income bonds are popular forms of investment. This is because they fulfil two important functions. They yield fixed-periodic returns as well as repaying the principal investment on maturity, making them the ideal form of investment for cautious or first-time investors.

An example of a fixed income bond would be a government bond with a 4% interest rate and a ten-year maturity. By investing $1,000 in this bond, you would earn $40 annually and your $1,000 would be repaid at the end of the tenth year. For many people, this represents the perfect risk-free investment.

Such a win-win situation couldn't be simpler, could it? Fixed income bonds provide a predictable source of income. They represent safe investments. And they operate outside of market trends and interest rate fluctuations. You will always be aware of the final payment of a fixed income bond.

The interest rates paid on the bond are fixed at the time of the issuing of the bond. From then on, it doesn't matter whether interest rates rise or fall, a bondholder is assured of the rate on his/her bonds.

The only way in which a bondholder might be negatively affected would be if they decided to sell their bonds earlier than the maturity date. A penalty might occur as a result.

This doesn't mean that fixed-income bonds are completely safe. When investing in fixed income bonds, you must consider several risk elements.

First of all, there is the credit risk. You must evaluate the creditworthiness of the issuer to minimise the risk of payment defaults. Bonds backed by governments and government agencies are considered the safest of all. They are unlikely to default on your payments.

Don't ignore interest rate fluctuations. They affect bond prices if they are sold prior to the maturity date.

Finally, there is an inflation risk. Annual inflation reduces the value of the returns.

Bearing all of these in mind, you should be able to choose the best fixed income bond for you. Then, you can sit back and watch as your money works for you, instead of you always working for it.

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