2017 Throwback: An Introduction To Bonds

As much as I wish I could introduce you to the basics of Agent 007 impersonators, I am actually talking about the kinds of bonds that make YOU money.

Everyone is aware of the sex appeal associated with stocks, but bonds unfortunately lack the same appeal especially when the stock market is in full bull-mode and there is far more money to be made in equities. People really only pay attention to bonds when their portfolios are at the risk of drastic losses, but if they made the effort to diversify in bonds in the first place they would have no reason to dread market fluctuations.

While bonds have never been my forte, I have made a conscious effort in recent months to learn about and emphasize the importance of using bonds to diversify your portfolio. In the coming weeks we'll discuss more about bonds, but for the moment this should provide you with the bare bones basics for understanding this crazy world of bonds...no, James'.

What exactly ARE bonds?

Just like people can borrow money from a bank, companies and governments also need to borrow money in order to expand their programs and into new markets. Unfortunately for large companies and municipalities, they need to borrow far more money for advanced projects than banks and financial institutions have on hand to offer. The solution, therefore, is to raise money from the public by issuing bonds (or other debt instruments). Collectively, thousands of investors lend the public a portion of the debt instruments needed to complete the loan, and in return the company or government will pay interest on the bonds issued to the public. Ultimately, a  bond is nothing more than a loan for which you are the lender. The organization that sells a bond is known as the issuer. You can think of a bond as an IOU given by a borrower (the issuer) to a lender (the investor). 

How do the interest payments work? 

Interest payments, which are made at a predetermined rate and schedule. The interest rate is often referred to as the coupon. The date on which the issuer has to repay the amount borrowed (known as face value) is called the maturity date. Bonds are known as fixed-income securities because you know the exact amount of cash you'll get back if you hold the security until maturity. 

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