Just as people need money, so do companies and governments. A company needs funds to expand into new markets, while governments need money for everything from infrastructure to social programs.
The problem large organizations run into is that they typically need far more money than the average bank can provide. The solution is to raise money by issuing bonds (or other debt instruments) to the public.
Thousands of investors then each lend a portion of the money needed by companies or governments. Really, a bond is nothing more than a loan for which you are the lender. The organization that sells a bond is known as the issuer. You can think of a bond as an IOU given by a borrower (the issuer) to a lender (the investor). Read more about Bond Basics.
In other words, “Buying bonds” means lending money to a government, municipality, corporation, federal agency or other entity known as the issuer. In return for the loan, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the face value of the bond (the principal) when it “matures,” or comes due.
If overall interest rates in the economy rise, the price of the bond will fall and vice-versa. For example, if you buy a bond at a par value of $1,000 with a 5% interest rate, if the interest rates rise to 7% for similar types of bonds, the price of the bond will fall below par value. This will only impact you if you sell before maturity of the bond.
What you should know about Bonds?
Learn how to think about bonds for your personal portfolio. How external factors, such as rate changes, can influence your bond investments. How to use information to your advantage and how you can protect yourself as an investor.
- Bonds come in several types (generally corporate and government) and may also include characteristics such as diversification, security and tax savings. When getting informed about bonds, be sure to ask about the interest rate, term of the loan, conditions, etc. The better informed you are, the more prepared you will be to make the most out of your bonds!
- Get to know more about Bonds
- Why to own bonds, how much will you earn, how safe is your bond,
- What do bonds ratings mean,
- Top things to know, how bonds work, types of bonds, buying bonds - Bond Basics.
Personal Financial Tips
- Pay your bills on time.
- Eat more at home and less out.
- Take your food to work.
- Forgo the ice cream store and pop popcorn at home.