|
Bonds
Did you ever think you'd give loan to a huge corporation, the city where you live, or even to the government? That's exactly what you're doing when you invest in corporate or government bonds.
Bonds are debt investments. When you buy a bond, you're lending your money, the principal you invest, to an issuer that needs cash. Most of these loans are for a specific period of time, called the bond's term, which can range from less than one year to 40 years or more.
How you make money with bonds
During a bond's term, you earn interest on your loan, which is the amount you invest to purchase the bond, just as you do on the money you deposit in a bank savings account. This is the bond issuer's way of compensating you for its use of your money. The interest is typically paid twice a year, though it may be on a different schedule.
The rate at which the interest is paid is usually fixed when you buy the bond and stays the same for the term, with longer-term bonds paying higher rates. This is to compensate you for lending money over a longer period of time. When the bond matures at the end of its term, the issuer promises to pay back your principal and any remaining interest.
The risk of default
One risk of buying bonds is that the issuer may not be able to meet its obligations to pay interest or repay principal. If that occurs, the issuer is in default and you could lose money. You can avoid bonds with the greatest risk of default by buying only those described as investment grade by the major credit rating companies. Bonds issued by the government aren't rated because they're considered essentially free of default risk.
Types of Bonds
Like many people, companies and governments sometimes need to borrow money to fund a project or to grow. That means you have different bond issuers to choose from, including corporations, the government, cities and states, as well as local government agencies. |
