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Bonds have proven themselves as a flexible investment option to satisfy just about any taste. Perhaps the risk/reward representation is nowhere more evident than in bonds, where investors can choose from a large variety of them to fit their preference.What also gives bonds an added advantage over other types of investments is their use as a fixed income resource. Given a good quality (investment grade) bond such as the Treasury bond, the bondholder can sit back and collect interest payments, as well as the original principal when the bond matures, without worrying about the price fluctuations in the market.

As a testament to the safety and value of bonds, it is noteworthy to mention that many governments also use bonds as one of the key components to back their economies. This is usually done with a mix of government bonds (e.g., Treasury bond) issued by strong economies such as those of the US, Japan, and Germany. Bonds are also very influential in the economy as they affect many things from the stock market to mortgage rates. That is precisely why they are used by the Fed (for interest rate manipulation) as the ultimate tools to steer the economy. When we talk about interest rates we mostly refer to bond yields, with the T-Bill’s yield indicating the short-term and the long bond’s yield indicating the long-term interest rates.

Gains And Losses

There are two ways to make money with bonds. The bondholder can keep the bond until maturity, collecting interest payments (and finally the original principal), or he may decide to sell the bond in the market for a higher price than originally purchased (if there are any takers). The difference between the two is that in the first scenario the profit realized by collecting interest is considered regular income by the IRS (Internal Revenue Service), while in the second case the profit realized is considered capital gains.Why should we care if the profit is classified …