Bonds

A bond is a loan given to a company or government by an investor in a nutshell. When a corporation or government entity needs money they issue what is called a bond. Investors buy these bonds with terms of say a year or more. In turn for the investor buying the bond, they are given interest on the bonds bought.

A company and government usually issues bonds when they have a new project like a bridge or some sort of ongoing expenses. For example if a city wants to build a new basketball coliseum, it needs to raise the money to be able to build right? The city will then issue a number of bonds for say $1000 and promise an annual return rate of 5% with a maturity rate of 10 yrs. So each year you will get a payment of $50, and at the end of the 10 yr. maturity rate you will get back your $1000 investment.

Some investors use bonds to hold a lump sum of money and while doing so they are able to generate a small revenue return. Bonds are considered a low risk and low return investment. Bonds do come with risk. Bonds with higher default rates come with a higher return rate but are more so than likely to default. Meaning the issuer can go bankrupt. 

The amount of risk to the investor depends on the reputation and financial stability of the issuer. So government bonds tend to be more stable than corporate. You will more than likely find a higher rate of return on bonds from corporate than from the government but they come with more risk if that makes sense.

There are a number of credit agencies that assign credit rating to different bonds to help investors make informative decisions. These agencies include Standard and Poor, Moody’s and Fitch ratings. Standard and Poor assign bond ratings of AAA, AA, A, BBB, BB, B, CCC, CC, C, and D. The D rating means the issuer of the bond is in default.

When investing in bonds keep in mind that it should be a part of an overall strategy of a portfolio of investments. Stocks, Dividend stocks, ETF's, Mutual funds, Home equity....etc