What are Bonds?
What are bonds?
Bonds are debt securities that are issued by corporations and governments to raise money. Unlike stocks, you don’t have ownership rights when you invest in bonds. This means that you most likely will not benefit from the company’s profit and losses. For this reason, bonds tend to be less volatile and can be less risky than stocks. They are essentially loan agreements between the issuer and the bondholder, in which the issuer agrees to make periodic interest payments, called coupons, and to repay the principal, or face value, of the loan at maturity.
Bond terms to know
If you’re considering investing in bonds, there are a few key terms to know.
Coupon: This is the interest rate paid by the bond.
Yield: This is a figure that shows the potential return you get on a bond.
Face value: This is the dollar value the bond is worth when it's issued, also known as "par" value. Most bonds have a face value of $1,000.
Price: This is the amount the bond would currently cost on the secondary market.
The key difference between a bond and a loan is that bonds are marketable securities, which means they can be bought and sold in financial markets.
At maturity, the bondholder receives the face value of the bond and the final interest payment. The term of a bond represents the length of time until the maturity date. The longer the term of the bond, the higher the interest payments. However, bonds with longer terms also involve more risk because there is a greater chance that interest rates will rise during the life of the bond, which would reduce the value of the bond.
Bonds are debt securities and are subject to credit risk. This means that the issuer of the bond may not be able to make the interest payments or repay the face value of the bond at maturity. If this happens, the bondholder could lose some or all of their investment. Bonds are also subject to interest rate risk. This means that if interest rates rise, the value of the bond will fall.
Bonds are an important part of a diversified investment portfolio. They can provide stability and income, while also offering the potential for capital appreciation. All of this being said, investors should consider their investment objectives and risks carefully before investing in bonds.
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