Pros and Cons of Long-Term Bonds

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Today our life is full of tech innovations and this tendency has already taken all spheres starting from media to food and clothes. It will not be a mistake to say that our world is changing every single minute.

Traders notice it better than anyone else. About ten years ago trading was too complicated. It demanded special tutoring and the apps were expensive. Today we can find all needed materials online within a few clicks. In addition, an army of developers offer their innovations for easier and profitable trading almost every day.

Forex Trading

One of the latest trends that has made too much fuss among traders is long-term bonds. We all got used to our regular debt investments (short-term bonds), that bring us profit by borrowing funds for some defined (tiny) period of time at fixed or variable interest rate. When it comes to long-term bonds, it works according to similar scheme, but the duration of such bet takes years.

Let us take a deeper look at this deal.

Pros of Long-Term Bonds

For instance, if a trader plans his or her retirement in about twenty five years, he or she might find it wise to purchase a twenty-five-year long bond with a 3,2% interest. 3,2% interest is much higher than those we get for regular bonds (0,2-0,7%).

It seems reasonable to pay once a higher price for larger profit from this long-term deal. Plus, a few of such deals might become a smart investment – buy once and live the life you have always wanted when retire. No constant need of having a keen sense of the pulse of stock exchange moves, etc.

Traders count all possible risks, detect their best purchase, buy those bonds and leave them there by the time they are ready to sell and enjoy happy retirement.

Cons of Long-Term Bonds

Now we should think about all those risks such operations hide. Professional traders warn people from taking such decisions because of:

  1. Inflation;
  2. Urgent money need;
  3. Interest rate risks.

Inflation is actually the worst process that ruins all intentions and hopes traders put in their long-term bonds. Even a 2% yearly inflation will destroy such investment by the end of that twenty-five-years term. We do not mention any profit, as customers are about to lose their investment completely.

Traders should consider all risks, even those no one can predict, like urgent need of money. Anything can happen during this term, but we should be ready to sell urgently our bond for much lower price than we have bought it as there will be no chance to wait for a proper moment.

The worst that can happen to such bonds is interest falling. We buy such bonds with all their debts we should pay away hoping that will put this company into better position. But no one gives us a warranty that decision will raise interests. It is a lottery anyway.

To conclude, in order to avoid all the possible risks, it is advisable to hire an experienced broker. Especially if you are willing to make a long-term bond.

In addition, the platform you use to trade places a crucial role too. When all risks are considered, do not hesitate to try your luck!

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  1. Sonali Sharma Avatar
    Sonali Sharma

    Commented on

    Right. The long term bond are profitable as it carries higher market risk and a bond with a longer maturity usually will pay a higher interest rate than a shorter-term bond.