What is a Bond?
Are you new to investing and curious what is a bond? This article aims to explain this to help give you a better understanding of this investing option.
A bond is a loan to an entity that you get paid back at the maturity date while collecting interest. They are considered debt because the entity that sold the bond now owes you money. Bonds can be sold by companies and banks, cities, and governments. Companies may sell bonds to help raise money for a new endeavor, cities to help build new infrastructure, and the federal government to help pay off debt.
When a bond is purchased, a set interest rate is given until the maturity date. If interest rates go up in the economy, the value of the bond may go down because other bonds will be sold at higher rates. You will still collect the designated interest, however, if you keep the bond until the maturity date.
At the maturity date, you are paid out the pre-set amount that varies from bond to bond.
There is still risk however, especially if the issuer does not make good on its interest payments (an example of this happening is if a company goes bankrupt and is not able to pay). Much like banks will check on credit history of an individual who wants to take out a loan, it’s important to understand the success and trustworthiness of a company before purchasing a bond by checking the bond rating (this is a letter grade the bond is given for its credit worthiness and risk).
Here are some widely used sources for checking bond ratings:
- www.Moodys.com (free registration required)
- www.Fitchratings.com (login required)
If you purchase a bond from a company, you have no ownership in that company. It is like a bank giving out a loan to a business. The bank has no ownership of the business; they simply gave money that will be paid back in interest.