When you think of making investments, it’s hard not to think of the word bond as well. Along with stocks, bonds are probably one of the most well-known ways to invest money.
But what are they exactly? And how are they utilized to make investors money? We will explore the basics of the investment tool to help you in the event that you want to make this your next investing move.
The Definition of a Bond
A bond is a debt instrument issued by large companies and organizations in order to raise capital that can’t otherwise be borrowed from banking institutions. Because businesses need large amounts of money to operate, they borrow money from investors by issuing bonds. As a sort of “thank you” for the loan the investor provides, the business agrees to pay back the money with interest on a predetermined date.
When you think of bonds, you probably also think of stocks, which are slightly different forms of investment. Whereas stocks are considered equity because through purchase you become an owner in a corporation, bonds are considered debt, which makes you a creditor to the corporation. As a creditor, you are entitled to a higher claim on assets than the shareholders (stock owners), which gives you the advantage of receiving payment before them in the event that the company goes bankrupt. The one drawback, however, is that as the bondholder, you don’t share in the profits if the company does well.
Bond Terminology
A way to help you understand more about the bond when making investments is to understand the terms you are likely to hear in reference to it. Here are a few terms that follow this investment tool:
- Lender – The investor lending the money to the organization.
- Issuer – The organization selling the bond/borrowing the money.
- Coupon – The interest rate you are assigned when purchasing your bond.
- Face Value – The amount the issuer borrowed.
- Maturity Date – The date on which the issuer must repay the amount borrowed.
There is a lot more to understand about making investments before you dive in and get started. However, by knowing the basics of the bond you are already on the right track. (Note: make sure you don’t get confused between a savings bond and a regular bond (also known as a corporate bond).