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What Is A Bond | All About Bond Investing

  • SUW 

A bond is a loan from an investor to a borrower such as a company or government. This is how they raise money to use. Think of yourself as the bank, and you are giving them money to use and being paid interest for it.

  • Government bonds
  • Corporate Bonds
  • Municipal Bonds
  • Many more

It’s considered a fixed income instrument because the terms are set at the beginning and it pays out according to those barring a default.

Owners of bonds are debtholders, or creditors, of the issuer.

Bond details include

  • end date/maturity date when the principal of the loan is due to be paid to the bond owner
  • terms for variable or fixed interest payments made by the borrower and

When they will be made

Maturity can be anywhere; 1-30 years

  • Less than 1 year= Commercial Paper or Bills
  • 1-10 years= Notes
  • 10-30years= Bonds

New Issue=company raising money thru bond

Face value-=cost to buy bond, usually set “at par”= $1000 per bond

  • The actual market price of a bond depends on a number of factors: the credit quality of the issuer, the length of time until expiration, and the coupon rate compared to the general interest rate environment at the time.

Coupon= interest from bond usually paid out twice per year

Coupon rate= interest rate

Callable- after certain time, they can return principle to you and whatever interest you earned in the time they held it and don’t have to pay interest after that. This is usually part of the terms.

Bond prices are inversely correlated with interest rates: when rates go up, bond prices fall and vice-versa.

You can sell your bonds to other investors or  buy bonds from other individuals—long after the original issuing organization raised capital so you don’t have to hold a bond all the way through to its maturity date

Can also repurchase the bond if interest rates decline, or if the borrower’s credit has improved, and it can reissue new bonds at a lower cost.

Backing for bonds is typically the payment ability of the issuer to generate revenue, although physical assets may also be used as collateral.

Because corporate bonds are typically seen as riskier than government bonds, they usually have higher interest rates.

The bond market tends to be less active than stock market, so commissions can be higher to buy them.

A stock is a type of investment that represents the ownership of a fraction of a corporation, whereas in a bond, they just borrow your money, pay it back with interest and the relationship is over.

There are pros and cons to both which is why people generally hold a mix in their portfolios and more bonds as they age.

Bonds are generally safer, but have less of an upside than stocks potentially do.

Depending on your risk tolerance, age, responsibilities and goals, you’ll have to assess for yourself where you want to put your money.

As a young guy, with no kids; I don’t currently hold any bonds.

As people age they may choose to hold 70 % stocks, 30% bonds and go progressively towards more bonds, and less stocks.

Cheers

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