Understanding What a Bond is Before You Invest
Make sure you understand what a bond is before you invest your money A bond is essentially IOU (I owe you).
Let's say you lent your friend 10 dollars, for whatever reason at that time he needed this money, maybe because he had to buy something but didn't have the money with him.
You lent him the 10 dollars and he promise to pay you back at a later date because he doesn't know when exactly he can pay you back.
Now as months go by, you couldn't get your money back, no matter how much you asked him for it or bugged him for it.
Now, you decided to go to a higher authority by going to his dad and explaining to the father that his son owes you 10 dollars.
The father laughs at the thought of you giving him the 10 dollars and he didn't even ask his son to pay you back the money nor did he reach for his wallet to pay you the 10 dollars for him.
If this has ever happened to you then you are a creditor.
What makes a Bond a Bond Suppose your friend were a huge company in the financial industry and need to come up with 10 million dollars.
Your friend cannot get the money out of thin air so what he does is issue a bond for an IOU that contains a serial number.
Whenever your friend needs money he will issue this bond and it will always have a certain face value called a principal or par value of the bond.
Most of the time they will not issue a bond for 10 million dollars, what they will do is issue a bond worth 1000 dollars and create 1000 bonds, which total 10 million dollars.
Who would buy these Bonds Because you issued these bonds you need people to buy these bonds.
You would go out and search for investors that will purchase your bonds for that price.
The bond will have a certain rate of interest, this rate will most likely be a fixed rate.
Over time this bond will be worth more than what you paid for it, which is called the bonds maturity.
If the bond has a 5 percent interest rate, each year you will get paid 50 dollars.
However most bonds will pay you twice a year, in this case you will get 25 dollars twice a year.
Conclusion Bonds are great way to invest your money without much risk.
The type of investing that has more of a risk is called stock trading.
Bonds will mature over time and is guaranteed as long as you don't sell the bond back to the issuer.
You will receive your 50 dollars a year for a long time.
Plenty of bonds are purchased as gifts and presents to little kids because they cannot cash in the bond until they reach 18 years of age.
By the time they reach 18 or over they will have plenty of cash for college or for a new car.
Let's say you lent your friend 10 dollars, for whatever reason at that time he needed this money, maybe because he had to buy something but didn't have the money with him.
You lent him the 10 dollars and he promise to pay you back at a later date because he doesn't know when exactly he can pay you back.
Now as months go by, you couldn't get your money back, no matter how much you asked him for it or bugged him for it.
Now, you decided to go to a higher authority by going to his dad and explaining to the father that his son owes you 10 dollars.
The father laughs at the thought of you giving him the 10 dollars and he didn't even ask his son to pay you back the money nor did he reach for his wallet to pay you the 10 dollars for him.
If this has ever happened to you then you are a creditor.
What makes a Bond a Bond Suppose your friend were a huge company in the financial industry and need to come up with 10 million dollars.
Your friend cannot get the money out of thin air so what he does is issue a bond for an IOU that contains a serial number.
Whenever your friend needs money he will issue this bond and it will always have a certain face value called a principal or par value of the bond.
Most of the time they will not issue a bond for 10 million dollars, what they will do is issue a bond worth 1000 dollars and create 1000 bonds, which total 10 million dollars.
Who would buy these Bonds Because you issued these bonds you need people to buy these bonds.
You would go out and search for investors that will purchase your bonds for that price.
The bond will have a certain rate of interest, this rate will most likely be a fixed rate.
Over time this bond will be worth more than what you paid for it, which is called the bonds maturity.
If the bond has a 5 percent interest rate, each year you will get paid 50 dollars.
However most bonds will pay you twice a year, in this case you will get 25 dollars twice a year.
Conclusion Bonds are great way to invest your money without much risk.
The type of investing that has more of a risk is called stock trading.
Bonds will mature over time and is guaranteed as long as you don't sell the bond back to the issuer.
You will receive your 50 dollars a year for a long time.
Plenty of bonds are purchased as gifts and presents to little kids because they cannot cash in the bond until they reach 18 years of age.
By the time they reach 18 or over they will have plenty of cash for college or for a new car.
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