When it comes to the holy trinity of investing, (stocks, bonds and cash) it seems the rules and nuances of investing in the bond market often are the most baffling for newcomers.
For this edition of Investing 101 we are going to demystify the bond market and have put together five quick tips to help you get your head around buying bonds.
1. What is a Bond?
Simply put, a bond is a loan. Just like a mortgage, bonds involve a lender and a borrower, and also come with a predetermined interest rate and maturity date that never changes. And just like you and me, bond issuers also have credit scores (or ratings) that make it more or less expensive for them to borrow depending on the likelihood that the lender will be paid back. Bonds typically are sold in $1,000 increments and have a face value (or par value) in the same amount.
2. How Do Bonds Work?
A bond is essentially a contract between a buyer and a seller in which the borrower (or issuer) agrees to make semi-annual (twice a year) payments to its creditors (that's you) until the agreed upon term is up (the maturity). At that point you get your original investment (or principal) back in one big lump.
The amount of these payments is determined by an interest rate (or coupon) that is fixed for the life of the bond or loan. You may have heard of the term "fixed income" investments before, well now you know it's because your Treasury bond, come hell or high water, will pay the exact same income, a feature that is particularly adored by retirees.Read More »from Understanding the $38 Trillion Bond Market in 5 Easy Steps