Bonds are liability instruments where an investor loans money to an entity at a fixed interest rate for a specified period. The entities could be banks, corporates, or government; hence bonds issued by governments are referred to as government bonds. These bonds, also known as fixed-income investments, allow state, federal, and local governments to accomplish projects. In addition, there are long-term bonds, say 10 year bond and short-term bonds, and the features differ depending on your investor. Below are the advantages of investing in long-term bonds;
Secure Investments
When investing in bonds, the immense risk you will face as a bondholder is the issuance agency defaulting on its obligation. If this happens, you will not continue to receive coupon payments or your maturity payment for the bond. However, government bonds are safer when compared to other entities such as corporations. It is unlikely that local or federal government will default on bonds. Corporations can declare bankruptcy, thereby defaulting on obligations from time to time.
Practical Projects
You may like the idea of having your funds support government projects as opposed to a faceless corporation. It is more satisfying to have your contributions funding efforts that you can easily see and understand. For instance, municipal bonds support essential efforts that better the livelihood of the local community and create jobs. As such, you will find it more attractive to purchase municipal bonds when you wish your investment to benefit the local and state community since they are channeled towards practical projects.
Tax Benefit
When you purchase bonds, you are mainly subject to federal and state income tax on interest income you get from your bond coupons. On the contrary, state bonds issued by the state are exempted from these federal taxes and, to some extent, state taxes. Moreover, some savings bonds are exempt from federal taxation. Hence, you will save a lot on taxes when you purchase 10 year bond. For instance, if you have $4,000 of interest in the 35% tax bracket, you can save up to $1400 when investing in municipal bonds.
Exemplary Returns
Lastly, the returns on state bonds are usually as good as bank deposits. Furthermore, you have a guarantee of the principal together with the fixed interest. Contrary to bank deposits, bonds are available for long-term investment. Moreover, you can purchase and sell government bonds as equity instruments since the liquidity is similar to banks and other financial institutions. Additionally, the bonds mitigate the risk of the general portfolio because government bonds are riskless investments.
