Bond returns refers to the amount of loss or gain that is received from a bond investment. The calculation of the return on a given bond normally includes the purchase price plus any interest income earned from the bond purchase. Barring any unusual circumstances, bonds are considered one of the safest types of investments and almost always earn a positive return.
As with other investment opportunities, the potential for higher bond returns involves purchasing a bond issue that carries a greater degree of risk. While bonds are a safe investment that appeal to conservative investors, there are several types of bonds that may be slightly more speculative, such as land bonds. With these riskier bond issues, it is often a good idea to look for investments that will mature in a relatively short period of time. The combination of higher potential bond returns and a maturity period of no more than a calendar year help to ensure there is less of a possibility of the bond funds being called and rolled into another bond offering.
When it comes to minimizing bond risk, municipal bonds are one of the best avenues to explore. While the bond returns are less spectacular, there is also an extremely high probability that the bond will yield exactly the return projected. For investors who prefer to avoid speculative investments, a bond fund of this type is an ideal way to earn more of a return than standard interest bearing savings accounts. Assuming the bond issue will only take a year or so to mature, this also means the investor’s assets are not tied up for long periods of time.
There are factors that will impact the bond returns earned from a given bond issue. Should the investor wish to sell the bond issue before maturity is reached, he or she will only realize interest income paid up to the point of sale. If the bond issue is sold for less than the original purchase price, this will also negatively impact the total return realized from the investment.
In the best case scenario, an investor will identify a bond issue that will remain stable for the life of the bond, mature within an acceptable period of time, and promises to yield bond returns that are competitive in the current economic climate. When all these factors exist and the investor holds on to the bond all the way to maturity, there is a high probability that the bond returns will be in line with the returns calculated by the investor before the purchase took place.