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What is a bond?
Bonds are basically loans issued by the government or a corporation, where the investor is the lender. In return, the bond issuer will pay the bondholder interest at a fixed rate over a predetermined period, agreed on at the time of purchase. This interest rate is known as a coupon. The investor will then get back the borrowed amount, also known as face value, par value or principal amount, on the maturity date, the date of which repayment was agreed on.
For example, Sam purchases a bond from a corporation of $1 million at a coupon rate of 2.8% per annum that matures on 1st January 2020. Sam is now the bondholder, and receives 2.8% of the face value from the corporation every year until maturity. At maturity, the corporation will pay Sam back the face value.
Why invest in Bonds?
Bondholders enjoy a fixed payment regularly until the bond matures, which is a form of passive income. This is especially important for retirees or the unemployed.
Unlike stocks (equities), there is certainty in the amount to be received upon maturity. Bonds not only keep their face value, but deliver interest on it as well.
As opposed to stock investors, bondholders are paid first in the unlikely event that a corporation encounters bankruptcy. Also, bond prices are far less volatile compared to stocks, which means you can use bonds to diversify portfolios and manage investment risk.
How Do I Make Money In Bonds?
In essence, bonds are structured to deliver profits to investors. Investors receive a coupon when they hold onto a bond which corresponds to a level of yield (or interest) on the bond principal (or face value). These coupons form the main...
Potential Capital Appreciation
Instead of holding a bond to maturity, investors may also choose to sell their bonds to other investors in the secondary market. This is similar to the stock market, where stocks change hands at prices agreed upon by both the buyer and the seller...
When Investing In Bonds
3 Key Considerations
3 Keys Bonds
What Types Of Bonds
Are Available For Investment?
When selecting a suitable bond for investment, it is important to understand the differences between the various types of bonds available for investment. With knowledge of different bond categories, investors can have a more realistic expectation of investment returns as well well-border-primary as a better understanding of the various risk factors involved with each bond investment. In this article, we highlight some of the features of several key categories of bonds:
- Developed Sovereign Bonds
- Quasi-sovereign Bonds
- Investment-grade Corporate Bonds
- Non-investment grade Corporate Bonds
Yield and Maturity
The rate of interest paid by the bond issuers on the bond face value. It is simply the annual coupon payment paid by the issuer relative to the face value.
An estimated rate of return. It assumes that the buyer of the bond will hold it until its maturity date, and will reinvest each interest payment at the same interest rate. Thus, yield to maturity includes the coupon rate within its calculation.
Yield & Maturity
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