InvestmentGradeBonds.net

Most bonds are issued with specified lifespans called maturities that range up to 30 years in length. It is rare to see a bond with a maturity of longer than 30 years, because most people aren’t interested in loaning out their money for longer than that.

A bond with a maturity of less than five years is known as a short bond. Bonds that have maturities of between 5 and 12 years are known as intermediate bonds. And bonds that mature in 12 years or more are known as long bonds.

Generally, the longer the maturity, the higher the interest rate for that bond. The longer a person’s money is tied up in an investment, the more money the demand to make over the life of that investment, so issues have to pay a higher interest rate if they want to keep the money for a longer period before they have to pay it back.

Certificates of Deposit from banks work the same way. A two year CD will typically pay a higher interest rate than a one year CD. Again, this is because people expect to be paid more for risking their money for a longer period of time.

The difference between the interest rates you would receive when investing in short bonds versus intermediate bonds or long bonds is called the yield curve.

Obviously, the longer you have your money tied up in an investment, the greater your risk. The longer it takes for the money to be paid back, the more chances there are for something to go wrong on the issuer’s end so that they would not be able to pay you back as promised.

But with that risk comes greater reward. If you bought a 10 year bond at 1% interest, you would make $100 in interest on a $1,000 investment over the life of the bond. If you bought a 30 year bond at 5% interest, you would make $1,500 on a $1,000 investment.

You have to decide how much risk you are willing to accept. If you are willing to accept more risk, go for longer maturity times. If not, stick with bonds that mature in 10 years or less. Alternatively, you may want to know how stock and bond investment differs by clicking on the link.