Premium Bonds vs. Discount Bonds

The many different types of investments that are made available through a wide variety of markets can leave a new investor lost. The reason why there are so many strategies involves the different overall goals of investors. Investors develop strategies to meet their financial goals and then act upon these ideas through appropriate investment vehicles. Some investments are conservative while other investments are aggressive. Some investments provide security while other types of investments present high risks. Of course, these facts are well known by everyday investors, but new investors should be aware of their options before jumping head first into the investment world.

One of the most well known investment vehicle is called bonds. Bonds are used for short term and long term investment goals, but there are many different types of bonds that new investors should be aware of. Some of the most popular types of bonds are premium bonds and discount bond, and these two types of bonds have a few differences. Bonds are typically used by investors who are looking for solutions to earn interest with their investments. In other words, bonds are investment vehicles that pay out interest to the bond investor.

Bonds are not only used to earn an interest, they can also be traded to earn a profit as well. Those who are on fixed incomes will generally invest in bonds because bonds provide a means of secure returns for a certain amount of time. However, the differences between bonds and discount bonds should be realized, especially by investors with fixed incomes. First off, premium bonds are an investment vehicle that is either purchased or traded higher than its actual worth. The main question most new investors will ask is why would anyone purchase bonds at a higher price than their actual worth?

The answer deals with interest alone. For example, when interest rates drop, the investor will look for older premium bonds that have a higher interest rate. Since the goal of the investor is to earn an interest rate, the investor will look for the highest paying bond. In this case, premium bonds will be used to avoid investments in other types of bonds that are not paying as much interest to the investor. On the other hand, discount bonds work differently than premium bonds. Instead of focusing on higher interest rates, discount bonds focus on the price in which the bond is being sold.

For example, discount bonds are sold below their face value. However, once the discount bond has matured, the bond holder can sell the bond at face value. While the investor earns interest payments from a premium bond, the discount bond holder does not receive interest payments. The sole purpose of purchasing a discount bond is not to earn interest, but to sell the bond at a higher price in the future. This is the classic form of investing where buy low sell high is the main ingredient. Identifying the differences between these two bonds will help the investor choose which one will be right for them.

Long term investors will choose discount bonds because the maturity date associated with discount bonds are typically long. On the other hand, premium bonds are usually short term investment strategies and a way for the investor to earn interest for a certain period of time. There are some tax advantages and disadvantages between these two types of bonds that investors should be aware of as well. Premium bonds will be associated with complicated tax figures while discount bonds in some cases are tax free. These differences will dictate which bond the investor will choose to meet their financial goals.

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