Bonds
WHAT ARE BONDS?
A bond is a debt security. Bonds represent money that has been borrowed by a company or a government agency.When a company or a government needs to raise capital, it can borrow the money from people willing to lend their money. To do this, it issues a bond. When you purchase a bond, you are lending money to a government, municipality, corporation, or other entity known as the issuer. In other words, when you invest your money in bonds, you are the creditor and the company or government agency who issues bonds is the borrower. 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 or the principal when it matures.
WHY INVEST IN BONDS?
Investors should maintain a diversified investment portfolio consisting of bonds, stocks and cash in varying percentages, depending upon their individual circumstances and objectives. Because bonds promise to pay a set amount of interest on a regular basis, bonds appeal to many investors and many people invest in them to preserve and increase their money or to recieve dependable income. If you are saving for your child’s college education, or saving to buy a new home in the future, or saving for your retirement, investing in bonds can help you achieve your financial goals.
Bonds typically have a predictable stream of payments and repayment of principal, that is why they are called Fixed-Income securities. Aside from the fixed interest that investors recieve(twice a year), another good thing with bonds is that the issuer promises to pay the loan in full and on time and is obligated to pay the income stipulated in the contract until the security matures regardless of how their business is doing. So bonds seem less risky than those investments that depend on the ups and downs of the stock market.
