What is a Bond?
A bond is nothing more than a loan. However, with a bond, you become the lender and the institution that issues the bond is the issuer. It can be thought of as an IOU given by a borrower (the issuer) to a lender (the investor).
What's the Point? Aren't Stocks a Better Investment?
Stocks can be a better investment, but the market is unpredictable in the short-term. On the other hand, bonds can be a good investment for retirement purposes as well as for the short-term in certain situations.
When Would a Bond be a Good Investment for the Short-Term?
For example, a student planning to go to graduate school decides to work for a few years before enrolling. Since the student may need money in the relatively near future, a fixed income security such as a bond is a good investment. Any situation that would make more sense living under a fixed income makes a bond a rational choice.
What are Some Characteristics of Bonds?
There are a few characteristics every investor should know about bonds in order to determine their face value. These include:
- Face Value/ Par Value - The face value is the amount of money a bond holder will receive once the bond matures. The par value is what the bond is selling at. If the face value is higher than the par value, the bond is selling at a discount. If the face value is lower than the par value, the bond is selling at a premium.
- Coupon or the Interest Rate - This is the amount the bondholder will receive as interest payments. It is called the coupon because sometimes the bond contains detachable coupons to tear off and redeem for interest.
- Maturity - The maturity date is the day when the bond is repaid. Maturities can range from one day to 30 years. One-year bonds are more predictable and less risky than 30-year bonds. The longer the time to maturity, the higher the interest rate. A longer term bond will also fluctuate more than a shorter term bond.
- Issuer - There are many factors to consider when determining what issuer to use such as:
- Default risk - Chance of debt being unpaid
- Yield - The annual percentage rate for interest
- Bond rating system - Aid for determining company's credit risk
What are the Different Kinds of Bonds?
There are several kinds of bonds. Each with their own characteristics.
Do I Need a Lawyer Experienced in Investments?
Consultation with an attorney for most investment decisions is probably unnecessary. However, if there is a dispute with your broker, such as when you lose a significant part of your investment based on the broker's bad advice, you should speak to a lawyer immediately. An experienced investments lawyer will help explain your rights as well as preserve any possible remedies you may have.
Consult a Lawyer - Present Your Case Now!
Last Modified: 11-28-2011 04:08 PM PST
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