What are Bonds and How Do They Work?
We have all borrowed money at some point of time. Just like people, firms and governments also need money. Companies require funds when they want to expand their product range or maybe step into a new market. Governments, on the other hand, require money for lots of things. The problem with large firms is that they at times need such large amounts of money that bank loans are just not enough. Companies then issue binds in order to raise money.
A bond, in essence, is just a loan for which you are the lender and a company (issuer) issuing the bond is the borrower. The bond's issuer gives the lender (you) interest payments. These are made at a rate and schedule that has been predetermined by the issuer. This interest rate is often called coupon and the date on which the company that has issued the bond has to repay the amount that has been borrowed is known as the maturity date.
Bonds are often referred to as 'fixed income securities'. The reason for this is that you the exact amount of money that you'll be getting back if you choose to hold the security till the bond has matured.
Bonds are a good investment and perfect for you if you don't like to invest in stock, which can be quite unpredictable. For people who are looking for a very long term investment (like retirement) or a short term one, bonds are a good solution. These help you ensure that you will get a fixed amount at the end of the day and also make the most of the interest payments. In addition, high yielding bonds can help you enhance your current income. As long as you have invested in bonds, you can rest assured that you will get your money back, plus interest payments at regular intervals.
If you want to find out more about bonds, you can always read online or talk to someone you know who has invested in them.
