What is a Bond?
Bonds are used widely in the investing world, but those that are new to investing may not be very familiar with all of the commonly used terms. People commonly refer to "stocks and bonds", and it is important to understand that they are two completely different things. A bond is basically an agreement made between an investor and a company in which the investor loans money to the company based on a certain interest rate. Businesses will borrow money from their investors for a variety of different reasons. One of the main reasons to borrow money from an investor is to expand their business.
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What is a Bond?[/caption]Companies can issue a bond with a predetermined interest rate and basically sell them to potential investors. Investors buy bonds expecting to get back their original investment, along with the interest that was predetermined. All bonds will have a maturity date, which is the date that the bond will be paid out to the investor.
The interest rate that is paid to bondholders will vary from one company to the next. The interest rate is determined based on a few factors. The main factor that is considered when determining the interest rate is the stability of the company. If a business is very stable, and unlikely to default on their debts, then it will usually offer a lower percentage rate. This is because the bond is far less risky. Businesses that are not as stable will pay a higher percentage rate in order to attract investors. This makes for a much more risky bond, but can have a higher payout in the end if they follow through with their end of the deal.
If you are a new investor, it may be wise to stick with the more reliable companies even though they may offer you a lower percentage rate. At least you will be able to rest assured in knowing that you will likely see your money again, along with the interest. If you are a seasoned investor, then you might be more willing to venture out with the riskier bonds in hopes to have a higher pay out in the end. The choice is ultimately yours, but you should definitely make wise choices when it comes to investing your hard earned dollars.
Why Consider Bonds?
Most people that invest are pretty familiar with the stock market, and consider it to be one of the best ways to invest money. With that being said, why would anyone choose to invest in a bond? The return on investment of a stock is generally much higher, but there are some advantages to choosing bonds.
First of all, bonds are far less risky than the stock market. This is because bonds are almost always paid out, unless a business ends up going bankrupt first. Next, bonds can offer a steady cash flow. Most bondholders will have the option to get a monthly or quarterly payout on the interest earned from their bond. This is great for those who need some additional steady income.
Although this article is a short reference, the following website provides some great video content on what a bond is.
Also, if you already have some experience with bonds, I would highly recommend conducting more research with video lessons that teach you how to invest in bonds like Warren Buffett
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