What are bonds?
There are times when a company or government needs to raise capital and one way they can do it is by issuing debt securities called bonds. The issuer specifies the terms of the bond, including the principal amount, interest rate, maturity date, and payment frequency.When investors purchase bonds, they basically loan money to the issuer for a defined period of time at a fixed or variable interest rate.
Key things to know about bonds
Bonds can be purchased directly from the issuer or on the secondary market. The price of a bond is determined by its face value (the principal amount), interest rate and prevailing market conditions.The issuer pays periodic interest payments to bondholders based on the agreed-upon interest rate, which are typically made semiannually or annually.
At maturity (the end of the bond's term), the issuer repays the principal amount to the bondholders.
Bond prices can fluctuate in response to changes in interest rates, credit quality, and market conditions. When interest rates rise, bonds often lose market value as existing bonds decrease in value to remain competitive with new bonds offering higher yields. Conversely, when interest rates fall, bond prices tend to increase.
What is the difference between bonds and stocks?
When you invest in a company’s stocks, you own a small percentage of that company. Whereas with bonds, you are simply loaning money to an entity without any ownership rights.Why bonds are worth the investment
- Fixed income: Bonds pay interest at regular rates and intervals, providing a steady stream of income and appealing to investors who seek regular income.
- Lower risk: Because bonds offer fixed income and repayment of principal at maturity, they are generally considered less risky than stocks. Including bonds in an investment portfolio can help reduce overall portfolio risk.
- Stability: Government bonds, particularly those issued by stable governments, are often viewed as safe-haven assets during times of economic uncertainty.