What are the advantages and disadvantages of bonds?

Answer 1

From an investor's perspective, bonds, contrary to stocks, have steady and predetermined cash payments ending with a known repayment of principal. Also, bonds are usually rated by various rating agencies for the probability of issuer default. So presumably, it is easier to assess their investment risk as compared to stocks. Finally, bond holders take priority over stock holders when bond issuers happen to be insolvent. These reasons are especially appealing for investors who want to secure a steady stream of payments and want to diversify/mange the risk in their portfolios. From an issuer's perspective, raising capital by issuing bonds involves paying regularly interest payments and returning principal at a determined date. None of these has to be done if a company raised capital by issuing stocks. However, interest expense lowers the effective tax rate for an issuer, and accounting professionals can use financial formulas to calculate the desired level of debt. They take into account such factors as prevailing market yields for simmlar debt, corporate tax rates, the company's rate of return on borrowed capital, and probably many more.

Answer 2

The biggest benefits associated with investing in high credit quality bonds are a predictable steady cash flow and safety of principal.

The biggest drawbacks of investing in bonds are credit risk and interest rate risk. It is always possible that a company or government issuing a bond could encounter financial difficulties. A bond default could result in a suspension of interest payments and/or a default on the bond principal. Duration or interest rate risk occurs when interest rates rise. An increase in interest rates causes the principal value of the bond to decline which could result in losses if an investor needs to sell the bond before maturity.