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A bond is a form of investment. Simply put, a bond is debt.

When you buy a bond you are basically offering a loan to a company or government, and the entity that you borrow from is then in debt to you; unlike a stock where you own a share (or a piece) of a company, with a bond you are just loaning the money for a certain amount of time.

Note: This article is for the investor wanting to know what a bond is (for investing purposes not macro economical purposes) so I won’t get too deep into monetizing, but I will say that bonds are often what people are referring to when they talk about the government printing more money out of thin air. This occurs through selling bonds to the public, as well as the government buying their own bonds (monetizing).

Rates of Return

Bonds usually offer a considerably safe return, which is why the return is generally much less than stocks, but this is not to say that there are never risks with them.

With any investment comes some form of risk.

The company or government offer a fixed interest rate that they will pay you over a certain period of time (usually paid out every 6 months). The interest rate is generally higher for longer term bonds, because the longer you let them keep your money, the more they are willing to pay you for it. The interest rate also usually depends on the credit rating of the issuer.

Example: a company with a low credit rating may offer a high interest rate on your money since they are less likely to actually pay out. These are often referred to ask junk bonds, which can be very risky, but also very rewarding.

Generally the safest assumed bonds are issued by the United States in the form of Treasuries. It is also generally believed to be fairly safe to buy them from large-cap corporations such as the companies in the Dow Jones. There are many types of bonds and many people believe that a certain amount of your portfolio should consist of some form of bonds, but make sure to do your research on the types before you dive into buying them.

Purchasing Bonds

Purchasing bonds can be a similar process to purchasing stocks and mutual funds; in fact, you can actually purchase bond funds or you can purchase them individually. You can purchase bonds through a broker or through an online brokerage account, similar to how you would purchase stocks. You also have the option to purchase government bonds directly from the government or the city through scheduled auctions.

Do you have experience with bonds? Share in the comments!

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