• Investment Tools: Bonds

Bonds are fixed income securities. Bonds are issued by companies, governments, municipalities, U.S. Treasury bonds, notes and bills. The safety and security of the bonds is determined by the issuer’s credit rating. If there is no credit rating, the return is more of a risk than obtaining a bond from a place that has a credit rating.

A bond is another way of securing a debt in which an investor loans money to an individual, corporation or government agency for a specific period of time at a fixed interest rate. Interest is normally paid every six months. The maturity of the bond depends on where the bond was acquired from. Government bonds normally mature in 30 years, treasure bills mature in 90 days and corporate and municipality bonds typically mature in 3-10 years.

Within the world of finance, investing in bonds is typically more predictable than investing in stocks because the yield is known up front. The bond yield reflects the annual expected return from investment allowing for the change in the price of bonds and bond payment coupons. The higher the bond yield, the safer the investment.

Bonds are inevitably a way to finance something. It is a way of getting a set amount of money up front and then providing the borrower a way to get external funds to finance long-term investments over time. This investment method can help business secure the cashflow needed for operations and expansion. The borrower pays the issue price for the bond and as long as interest is paid during the duration of the bond terms, will be under no further obligation after the maturity date.