If you are looking for ways to make your money work for you in the financial world, you will most likely turn to funds or stocks. Some people prefer options while some others prefer forex. However, for those who are more conservative in nature, the idea of investing in bonds may seem the most appealing of the lot. In this series, we will be exploring and understanding how to invest in bonds, as well as the advantages of parking your cash in bonds. In the end, you should have a clear understanding of what a bond is, and whether bonds is a suitable investment vehicle for you. Our first topic is answering the question, what are bonds?
What are bonds? In short, bonds are essentially debts. What does this mean? This means that the person that issues a bond is actually owing the person that holds the bond a debt. This relationship allows the holder of the bond to generate an income in the form of interest from the seller of the bond. Bonds usually also come with a date which stipulates that the amount owed will be returned in full. This date is called the “maturity date”. The interest generated from the bond can be paid on a monthly, quarterly or annual basis.
It is important to note that the principal of the bond does not vary throughout its lifetime. This means that if you bought the bond at $5,000, you will receive exactly $5,000 at the maturity date of the bond. However, it is likely that your bond yield you interest throughout this period of time. There are generally two kinds of yield: current yield and yield to maturity. We will go through this shortly.
Of course, there are many different kinds of bonds on the market. The most common of which are government bonds. Government bonds are usually treated as risk free bonds. This means that you will get your principal back no matter what happens. The reason for this is because it can be generally assumed that government will always have the money to do so.
Bonds are quite different from stocks because unlike stocks, you do not actually own part of the company or organization from which you bought the bonds. In reality, you are purchasing a credit or piece of debt of the company. This also means that if the company or organization goes bankrupt, you will be placed in the highest priority of receiving your deserved payout because of your role as a creditor.