BONDS 101

When you say "Bond" people think Bail Bonds, James Bond, bonds of friendship, andddd then there is a Bond that is debt or a loan. Most people do not tend to think about what a Bond actually is. Imagine a bond is like a piece of paper that says I Owe You. People buy bonds with the promise that they will receive money at a future date and time. Back in the day it literally used to be a piece of paper but now most businesses they are produced electronically. 

For the most part Bonds are traded on exchanges, see back to Stock Market 101 for info about the stock exchange. When a company needs to raise money to support their business or a certain project they will issue Bonds. People will buy these bonds as an investment. The investor in the bond is usually promised a principal and a coupon.

What is the principal?

The amount promised to the buyer at maturity of the bond. For example, if a bond matures in 30 years and has a face value of $1000 then in 30 years the issuer of the bond as to pay the investor $1000 dollars.

What is a coupon?

Since the investor is lending money they are often given an incentive. This is a coupon. It could be a 4%, 5%, 10% coupon paid in different intervals. For example if it is a 5% coupon paid annually then every year the investor would get 5% of $1000 or $50. 

 

This is simple BOND 101. But it is important to know what these instruments are since they make up a huge part of the market.

 

What do they mean to you? Bonds are a pretty safe investment. If you are looking to invest money somewhere you can look at bonds to make a safe return.