Types of Investments : Bonds

Bonds Basics :

Bond...James Bond...

Hahaha...Surprised? nope...I am not doing a movie or character review...it is still financial matter. ;)!

Today we are going to look at bonds..lets skip the what question and go straight to point, a bond is a loan and you are the lender.

Well, who's the borrower?

Usually, it's either the local government, a state, a local administrative district or a big company. As we know, all of these entities need money to operate; to fund the federal deficit, for instance, or to build roads and finance factories.

But then where do they get it from? they acquire capital from the public by issuing bonds.

Usually when a bond is issued, the price you pay is known as its "face value." Once you buy it (whatever the price is), the issuer is expected to pay you back on a particular day (the "maturity date") -- at a predetermined rate of interest . 

The "coupon." Say, for instance, you buy a bond with a $10,000 face value, a 7% coupon and a 5-year maturity. You would collect interest payments totaling in each of those 5 years. When the 5 years was up, you'd get back your $10,000 and leave.

The primal difference between stocks and bonds is that stocks does not guarantee anything about dividends or returns. Although dividend may be as regular as a heartbeat, but the company is under no obligation to pay it (but as they see fit). And while stock spends most of its time moving upward, it has been known to spend months sometimes even years --going the other way.

When companies or entities issues a bond, however, the company/entity warrants to pay back your principal (the face value) plus interest.

If you buy the bond and hold it to maturity, you know exactly how much you're going to get back (in most cases, anyway).

This is why bonds are also known as "fixed-income" investments as they assure you a steady payout or yearly income. And although they can carry plenty of risk , this regular income is what makes them inherently less volatile than stocks.