What Are Bonds And How Do I Invest In Bonds?

Bonds are a “debt security” where an issuer of the bonds takes on a debt with the person buying the bond. The bond issuer is required to pay back the loan at interest at a fixed later time, which is generally known as the “maturity” of the bond. Therefore, a “bond holder” is a creditor, while the company or government issuing bonds is a debtor.

Differences Between Stocks & Bonds

The differences between stocks & bonds is in ownership. When you buy stock in a company, you are buying ownership in that company. You have what is called an “equity stake”. If the company’s stock prices go up, the value of that percentage of ownership goes up and you make a profit. If the price of stock goes down, your percentage of the company loses value and you lose money on your investment.

When you buy a bond issues by a company, you are simply a creditor to that company (or government, in the case of government bonds). You own no stake in the company and have no equity. Therefore, regardless of the stock price of that company, it still owes you the same fixed amount. Typically, bonds don’t pay the kind of interest as (successful) stocks, but they are safer investments.

What are bonds and how do I invest in them?

When a credit institution, corporation or government wants to issue bonds, that entity underwrites these bonds by forming a syndicate and issuing bonds from a bond issuer. These are then resold to bond investors. The underwriter (typically a syndicate of banks) accepts a certain amount of this venture, but receives a premium on the bonds. These are resold to the public. Governments tend to sell their bonds at auction.

Bonds Are Good Retirement Investments

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Bonds are good retirement investments, because these are long-term loans which your debtors are obligated to repay. Investing in government-issued bonds is one of the safest investments, because the debtor is the U.S. government. If you find that the United States government defaults on its bond debts, you’ll probably have much larger problems than getting a return on your investment in bonds.

Bond Terminology

Here are a few bond terms you’ll want to know about.

  • Maturity Date – When the bond “matures” or the issue price and interest must be repaid to you. There are three kinds of maturity dates in America at the present: short term bills of up to 1 year, medium term bills or notes of between 1 and 10 years and, finally, long term bonds where the maturity date is longer than ten years from issuance.
  • Convertible Bond – A bond that can be converted into common stock in a number of instances.
  • Exchangeable Bond – A bond that can be converted into the common stock of a company other than the company which issued you the bonds. This is the most flexible type of bond.
  • Coupon – This sounds like something else, but is really only the interest rate the bond issuer must pay you.