For investors, the choice of which bond to buy can be tricky.
Bond investors face a big choice when they have money to invest: Should they pick long-term bonds or short-term bonds for their portfolios? Both types of bonds have advantages and disadvantages, so there's no one right answer for everyone. Instead, you have to look at the pros and cons of both long- and short-term bonds to see if the rewards outweigh the potential problems.
Short-term bonds
Short-term bonds are attractive to many investors because they don't require you to tie up your money for long periods of time. They're suitable for those who will need to spend their invested money in the near future, but they can also be useful even for long-term investors. For instance, if you expect a rise in interest rates over the short run, then investing in a short-term bond will let you reinvest the money at maturity in a bond that by then should be paying a much higher interest rate.
The downside of short-term bonds is that they generally pay lower interest rates than long-term bonds. As a result, in order to get the benefits of a short-term bond, you typically earn less income, forcing you to make sure that the advantages short-term bond investing brings are truly worth it for you.
Long-term bonds
Long-term bonds have much different attributes from short-term bonds. With a long-term bond, you'll typically earn a higher interest rate, as the entities that issue the bonds will be willing to pay more in interest in exchange for the security of locking in a known rate for a longer period of time. If you need to maximize income, then a long-term bond can look extremely attractive.
The downside of long-term bonds is that you lack the flexibility that a short-term bond offers. If interest rates rise, for instance, the value of a long-term bond will usually go down, penalizing you for having committed to a locked-in rate for the long haul. In addition, depending on the issuer, a long-term bond can have a greater risk of default -- especially if the same issuer has other outstanding bonds that mature before the bonds you own.
Solving the dilemma
Most investors end up having a mix of short- and long-term bonds in their portfolios in order to get the best of both worlds. Yet the question still remains how much to invest in each kind, and how you answer that will depend on which traits of each type are more attractive to you. Both short- and long-term bonds are suitable investments for most portfolios. Visit our broker center to set up an investing account and buy either -- or both -- today.
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FAQs
Short-term bonds are ideal for conservative investors, those nearing retirement, or those with financial goals in the near future due to their lower risk and greater liquidity. Long-term bonds, offering higher yields, are more suitable for investors with higher risk tolerance and longer investment horizons.
Why are long-term bonds more risky than short-term money market securities? ›
There are two primary reasons why long-term bonds are subject to greater interest rate risk than short-term bonds: There is a greater probability that interest rates will rise (and thus negatively affect a bond's market price) within a longer time period than within a shorter period.
When or why would companies prefer to issue long-term bonds over short-term bonds? ›
The Treasury yield curve is usually upward-sloping, meaning longer-term securities yield more than shorter-term securities. This makes sense, because investors often demand higher yields for locking their money up for a longer period.
Which bonds to buy in 2024? ›
Our picks at a glance
| Fund | Yield | Net expense ratio |
|---|
| American Century High Income Fund Investor Class (AHIVX) | 6.9% | 0.78% |
| Fidelity Capital & Income Fund (fa*gIX) | 6.1% | 0.93% |
| BrandywineGLOBAL – High Yield Fund Class A (BGHAX) | 6.8% | 0.92% |
| Principal High Yield Fund Class A (CPHYX) | 7.1% | 0.94% |
5 more rowsMay 20, 2024
A short-term bond will typically mature within no more than three years. A long-term bond may not mature until after 10 years. The bond's "coupon" or interest should be paid out a few times a year in either case.
What is the main difference between short term and long term interest rates? ›
A short-term interest rate is the interest rate charged on a short-term loan. A long-term interest rate is the interest rate charged on a long-term loan. The major difference between a short-term interest rate and a long-term interest rate is the length of time it takes to pay back the loan.
Is it a good time to buy bonds now? ›
Answer: Now may be the perfect time to invest in bonds. Yields are at levels you could only dream of 15 years ago, so you'd be locking in substantial, regular income. And, of course, bonds act as a diversifier to your stock portfolio.
Should you buy bonds when interest rates are high? ›
Should I only buy bonds when interest rates are high? There are advantages to purchasing bonds after interest rates have risen. Along with generating a larger income stream, such bonds may be subject to less interest rate risk, as there may be a reduced chance of rates moving significantly higher from current levels.
Why are bonds losing money right now? ›
Interest rate changes are the primary culprit when bond exchange-traded funds (ETFs) lose value. As interest rates rise, the prices of existing bonds fall, which impacts the value of the ETFs holding these assets.
What are the risks of short term bonds? ›
Like other bonds, short-term bonds are subject to two main types of risk: interest-rate risk and credit risk. Because bond prices and market interest rates move in opposite directions, short-term bonds lose value when interest rates rise.
The purpose of a bond issue is to borrow money to finance major capital projects. A capital project is generally defined as a project expected to have a useful life of 10 years or more which is estimated to cost in excess of $100,000.
What are the major disadvantages of using bonds for long term financing? ›
Historically, bonds have provided lower long-term returns than stocks. Bond prices fall when interest rates go up. Long-term bonds, especially, suffer from price fluctuations as interest rates rise and fall.
What is the safest fixed income? ›
Most experts consider Treasuries to be the safest fixed-income investments because they are backed by the government.
What is the best treasury bond to buy right now? ›
9 of the Best Bond ETFs to Buy Now
| Bond ETF | Expense Ratio | Yield to maturity |
|---|
| SPDR Bloomberg 3-12 Month T-Bill ETF (BILS) | 0.135% | 5.3% |
| iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) | 0.14% | 5.4% |
| The US Treasury 10 Year Note ETF (UTEN) | 0.15% | 4.3%* |
| F/m 10-Year Investment Grade Corporate Bond ETF (ZTEN) | 0.15% | 5.5%* |
5 more rows4 days ago
The various types of bonds that are offered by the U.S. Treasury are considered to be among the safest in the world. Because of their relatively low risk, government bonds typically pay low interest rates.
What are the cons of long term bonds? ›
The downside of long-term bonds is that you lack the flexibility that a short-term bond offers. If interest rates rise, for instance, the value of a long-term bond will usually go down, penalizing you for having committed to a locked-in rate for the long haul.
Which is better short term or long term investment? ›
There are several risks that are involved with investments which is why the stock market has a 50:50 success rate. It is for this reason, that short-term equity investments are considered as risky, whereas long-term investments are considered much more profitable and consistent in terms of returns.
What is the main difference between short term and long term finance? ›
The most evident difference between short and long-term financing is their duration. Short-term loans normally have a repayment duration of year or less, though some might be as short as a few weeks or months. Long-term loans, on the other hand, have a longer repayment period, which might last several years.
Are short term or long term bonds better in a recession? ›
A bond with a short term rate will usually pay lower yields than a longer term bond, but it will offer more liquidity. Although this may not be a concern during times of economic growth, during a recession, the liquidity of assets is an essential factor.
