Investing money by trading in financial markets is a formidable task, not only because it heavily relies on how the investors interpret the world experiences around them but also because it depends on how they learn from their past mistakes. It is important to note that the modern global financial market falls back on confidence and trust of the investors themselves. If this confidence and trust diminish, money and stock certificates will cease to hold value. Most importantly, it is key to be conscious of the investment scopes. This document intends to explore government and corporate bonds as common investment scopes and to investigate their status as safe investment choices.
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Statement of the Problem
In essence, very few investors approach financial markets while fully aware of the psychological and financial risks involved. This subjects the majority to many financial risks. According to research, financial markets tend to possess properties that protect the integrity of the treasure that investors seek to pursue (Plummer, 2009). The major problem is that there is an energy in the economic activity that seemingly coerces and organizes investors into a single-minded unit (Plummer, 2009, p 1). This psychological force is so powerful that many investors do not recognize it until they are entangled with a disastrous market that obliterates years of hard work. In the following sections, I will briefly expound on the risks involved in government bonds and corporate bonds as financial investments in the financial markets in order to give guiding principles of approaching financial markets.
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Are government bonds a safe investment?
It is necessary to understand the dynamic forces that manipulate government bonds as well as their nature in order to approach the question of government bonds as a safe investment. Inherently, governments bonds are interest-generating securities which the government issues by promising to pay an investor a certain amount of money at a specified date. They are categorized into treasury bonds, treasury notes, and treasury bills. The difference rests on the time of maturation. While treasury bonds mature in more than ten years, treasury notes and bills in one to ten years and less than one year respectively.
Government bonds are considered extremely safe because there is a very little likelihood of the government defaulting on the loans. In the case of the United States, there is a very large global market for U.S. treasury securities that investors can easily sell or purchase. This makes U.S. treasury securities a safe way to invest because the government is the guarantor (Tucci, 2016, p 112). However, because foreign government bonds may pose higher risks depending on debts of the specific country, the investor should thoroughly scrutinize the region or country before devoting his capital. On the whole, government bonds offer investors one of the safest ways to invest in the financial markets.
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How risky are corporate bonds as an investment?
Public and private companies often issue debt obligations in order to raise capital and finance business operations. These obligations are termed as corporate bonds. They fall into various categories including conglomerates, industrial corporations, financial services companies, transportation companies, public utilities (Ramaswamy, 2004, p 23). As opposed to government bonds, corporate bonds are subject to a variety of risks. They include liquidity, credit, industry, interest rate, cyclical, and company-specific risks (Crabbe and Fabozzi, 2003, p 1). Thus it is imperative for investors to demand higher returns on corporate bond portfolios in order to compensate the increased risks.
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The safety of government and corporate bonds depends on the risk involved. Government bonds are a safe form of investment in financial markets because the government is the guarantor and is less likely to default on the loans. The risks involved are also minimal. On the other hand, corporate bonds are less safe because of the presence of liquidity, credit, industry, interest rate, cyclical, and company-specific risks. It is, therefore, indispensable for investors to conduct a risk analysis before making any investment decisions.