Financial Foundations: Bonds
Hi! I’m Nick, and welcome to Financial Foundations. I’m going to cover several concepts of investing that may seem confusing and show you that they’re actually simpler than you think. Let’s talk about bonds.
So, what is a bond? Well, oftentimes bonds are also known as fixed income investments. A bond is pretty much an I.O.U. issued to individuals by a company or government that needs to borrow money for whatever reason.
When an individual purchases a bond at face value, the issuer of the bond promises to repay that whole amount in an agreed upon number of years, known as a maturity date, in addition to paying him or her a fixed rate of interest, known as a coupon rate, while the bond is outstanding.
Additionally, when an investor purchases a bond, they are not required to keep it until their term expires, but they can sell it on a bond market.
Let’s look at an example to get a better understanding. Let’s look at Nick Corp! Let’s say that Nick Corp wants to build a new regional office in New York City but doesn’t have enough money to do so. So, Nick Corp decides to sell bonds to investors at $1,000 and agrees to pay them back in 5 years and pay them 5% interest each year.
Let’s say that you decide to buy a Nick Corp bond. So today you purchase one for $1,000. Now over the next 5 years, Nick Corp will pay you 5% interest, right? So you’ll get $50 each year for lending Nick Corp the money. Now at the end of five years after they’ve built the building, Nick Corp will repay you that $1,000. So in a period of 5 years, your $1,000 will grow to $1,250.
Pretty simple to understand, right? Now, bonds are considered to be a less risky investment option and because of that the return on investment is typically lower than if you were to invest into stocks. However, it can be a good idea to invest into bonds with your shorter-term money that you may be needing in 5 years or less.
There you go! You now know what a bond is. I’m Nick and thanks for joining me on Financial Foundations. See you next time!