Bonds

What are bonds?

A bond is one of many financial instruments used to invest money into.

A bond is in essence a form of loan in which the issuer of the bond (borrower) owes the holder (lender) a debt. The debt is then paid back in intervals over a period of time or are at a later expiration date set by the bond. The amount paid back is usually the initial sum of money plus interest. The amount of interest and the rate at which it is paid depends on the terms of the bond issued. In most countries the interest rate, formally called coupon, is paid by the issuer to the
holder of the bond every six months.

Investment Bonds

Investors / Financial Bonds

Many investors view bonds as a safe way to invest their money for an
extended period of time, this is especially true for bonds issued by
the government.

The reason for this is because the debt owned by the
issuer to the holder of the bond hardly fluctuates in value, which is
in stark contrast to stocks, which are another form of investment.

So while stocks can significantly depreciate or gain value in a short
period of time in response to various market developments, bonds will
on the other hand, once issued, stay true to their terms. The amount
of money that is owned by the issuer will remain the same, with only
the interest rate subject to changes – some bonds have fixed interest
rate while others can vary with a money market index. This is one of
the main reasons why bonds are considered a safe way of investing
money, coupled with the fact that government bonds are always
guaranteed.

The one aspect of a bond that is subject to change in response to
various market developments is its trading price on the markets (bond
markets).

Another difference between bonds and stocks is that stocks do not have
an expiration date, they are valid and can be held onto indefinitely,
unless the company whose stock you own goes bankrupt. The final
biggest difference between bonds and stocks is that when you own a
company’s stock you are legally the owner (possibly one of many) of
the company because you have a vested interest (equity stake) in the
company. Whereas when you are the holder of a bond you are merely
loaning, with interest, your money to the company.

Most bonds have a relatively low return on investment percentage (ROI)
due to their stable and low risk nature, especially those issued by
the government or supranational institutions. This is why they are
more suited as a method of protecting your money from inflation rather
than a high yielding investment. However, there are bonds, typically
known as ‘junk bonds’, that are relatively high yielding and provide a
high ROI but at the cost of much higher risk associated with them.

Investing in bonds is usually done through bond funds, which are owned
and managed by financial institutions like banks, investment groups,
pension funds, etc. There are many type of bond funds on the market,
all with different characteristics and terms – therefore it is
paramount to do some research prior to investing in order to find the
right bond fund, one that coincides with your own goals and interests.
There are many websites that can help you with your research, one of
them is www.morningstar.com.

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Subjects keywords: Bonds, Definition of bonds, investment bonds, investing in bonds, how to invest in bonds, financial bonds. All information about bonds.