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What are Short-Term Bonds?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 29 November 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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Short-term bonds are bond issues that are structured with maturity dates that are no more than three years from the issue dates. This includes municipal and other bonds that are set to reach bond maturity in one year or less. Generally, short-term bonds tend to pay higher interest rates, but also carry a greater degree of risk than bond issues set to mature after more than three years. There is some difference of opinion among investors as to the wisdom in focusing a great deal of attention or investing a great deal of money in this particular type of bond issue.

One of the primary benefits of short-term bonds is the relatively quick turnaround on the investment. Even if the terms and provisions of the bond calls for settling the interest and the principal at the bond maturity date, the investor does not have to wait for very long to realize the return. This can be especially helpful if the purpose for the investment was to generate funds for use with a specific project that is set to launch shortly after the bond has matured. Investors sometimes include a combination of short- and long-term bonds in the portfolio as a means of generating an ongoing return that can be reinvested into different types of options several times each year.

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Another benefit of short-term bonds is the higher rate of interest that is typical of this type of investment opportunity. While still typically lower in returns that investments other than bond issues, the rate on a one or two year bond is often anywhere from 30% to 50% higher than bond issues structured with a longer term. When coupled with the opportunity to earn returns faster, this higher rate of return can be very attractive.

One potential downside of short-term bonds is the rate of volatility that is carried with investments of this type. While all bond issues tend to represent less risk than stocks or commodities, the investor who goes with a short-term bond does assume a greater degree of risk than an investor who goes with a bond that will mature in more than three years. For this reason, it is often a good idea to look closely at the entity issuing the bond, considering any potential that may exist for default. In addition, read the bond terms and conditions carefully, so that there is no misunderstanding about the rights of the issuer to call the bond early and possibly minimize the amount of return that is earned from the investment.

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