It’s a bit like bonding with the government or a corporation over an investment

It’s called bond for a reason. One of the main aspects of bonds is that they are a tool to gain fixed income from an investment. Another aspect of bonds, is that they are much more complicated than stocks and that jazz, the main reason being that they are made between governments and corporations, requiring more regulations (and paper work).

What is a bond?

It’s a unit they forgot to teach you about in class. They are a tradable corporate or governmental debt. Just like stocks have dividends, bonds have coupons, but not the kind you get from your local supermarket. Coupons are a fixed interest rate on the debt which is paid out as a fixed income instrument to debtors. Bonds and stocks are both types of securities, but when one has a stock they also share an equity stake of the company they invested in, whereas with bonds one just has a lender stake. Because of this bondholders get paid before stockholders, as their gain is solely monetary, whereas a stockholder also shares part of the value of the company.

The Promised Bond

Used by governments and businesses to carry out projects, bonds are a promise. They are what keeps cities, and schools, and roads running. They are also what helps corporations grow larger, as they often borrow money to speed up their growth (when banks aren’t enough...we are talking large money here). There’s four categories of bonds whose name changes according to the entity that issues them. These are: corporate bonds, municipal bonds, agency bonds, and governmental bonds. Interest rates and bonds also have a special bond (sorry for the pun), as when interest rates go down, bond prices rise - and vice-versa.

Three ways of bonding (in the U.S.)

Bonds are a bit hierarchical, but not in the way one would expect. Bonds are subdivided according to their risk. The less risky bonds are the ones with governments, as they are regulated by a federal system. Then there’s the low to medium risk bonds, which are the ones sold by corporations, counties, states, and municipalities. Let’s just say for the sake of memory aids, that these set the bar, and that’s why they are called “investment grade”. Last but not least are the high-risk bonds, the ones that like to live life on the edge, and are junk. Sadly this isn’t one of our bad jokes, they are  actually called “junk bonds”, or, if you want to be a little fancier “below-investment-grade bonds”. These all have maturity dates, unlike stocks which can be held forever, by when the face value amount, or the value of the bond at maturity,  must be paid back. A bondholder however is not obliged to keep the bond till that date, as bonds can be purchased back by the debtors.

Why will your future self thank you?

Bonds are a very boring investment. But you know what? Sometimes it’s good to be boring, because in investing this also means safe and sound. Unlike stocks, which are quite moody, bonds provide a stable source of income one can rely on - especially when one’s stocks are not doing as great as expected.

Extra bits:

  1. The bond market is larger than the stock market. Sorry.

2. Interest rates and bonds move in opposite directions. If a bond goes up, interest rates go down - and the opposite is true as well. One up, one down apparently is also a beer game.

3. We don’t know about you, but bonds sometimes sound like a supervillain vs. superman saga. Oh wait, that’s just called James Bond.