Basic Definition

The very basic understanding of what bonds are is that they are a form of debt security. In short, bonds are basically IOUs issued by the government as well as different companies in order for them to gain funds for operational use as well as to have financing for certain projects. When an investor buys a bond, he is in fact trying to loan money to the company or government that is good for a certain period of time.

And because the bond issuer gets a loan from the investor, the company or the government is tasked to pay for it with interest on a specific date. The specified date of payment is usually known as the bond’s maturity date. The length of time from the bond issue to the maturity date is referred to as the bond’s term.

Long Term Bonds

Long term bonds are those bonds considered to have a bond term stretching from 20 to 40 plus years. Such types of bonds usually offer the highest yields or rate of interest among bonds since they take considerably longer to mature. But then again, such investments in long term bonds can have an investor’s capital stuck on it for a longer period of time, giving him less capital to invest on other options.

Short Term Bonds

Short term bonds are those bonds with terms that range from three years or less. Such bonds offer the least yields for investors, but with maturity at shorter dates, can offer quicker returns for investors. But investing can be more complicated than it usually is considering the risks involved.

Issues regarding whether to invest on short term or long term bonds would depend on certain situations as well as the personal needs of the investor. If the money being invested may be used in the immediate future, then investing in short term bonds would be ideal. If it is money that is being saved and not needed for a long while, then longer term bonds may be considered. But there are also certain factors to consider aside from when the invested fund would be used.

There is also the case of a rise in interest rates that investors should consider which can affect bond price negatively. Longer term bonds may actually suffer with reduced earnings if they go though a period of rising interest rates, which is the likely scenario in most markets. Short term bonds on the other hand, have a shorter term before investors can unload them and may get a more favorable deal in terms of value when interest rates are being factored in.