When an investor purchases bonds, they are essentially loaning money to a government, municipalities, institution or corporation with the intention of netting a return of the principal plus interest over a long-term period. Bonds usually mature over a time horizon of 10 to 30 years.
On a corporate level, bonds are most commonly issued by businesses is in need of raising capital for expansion or to fund their current operations.
Bonds are generated when the company borrows money from either individual investors, pension funds or mutual funds. A company is typically held to pay back the principal, plus the interest by a set maturity date, but the bondholder is paid in installments in intervals.
In the United States, it is most common for bondholders to receive a check twice a year, but there are some companies that pay monthly. Bonds as investments are known for being geared towards retirees as well as individuals who are in need of cash based on their ability to offer monthly or bi-annual payouts, giving those people money to live on or to reinvest. In essence, it provides the investor with a source of fixed income.
High or Low Interest Rates
Different bond investments hold varying interest returns depending on the risk and the company you are buying the bond from. It is typical that more established and stable companies have lower interest rates due to the fact that they are considered safer investments and with less risk of going bankrupt. On the other hand, for companies such as young startups or companies in distress, there is typically more risk in their success so they offer higher interest rates to their bondholders. The actual interest rates are subject to the market’s conditions.
Different Ways to Own Bonds
Individual Bonds: The interest and the principal payments are subject to the success and creditworthiness of the company issuing the bond. The returns are set on a fixed schedule where they are held liable to repay the principal as well as the interest. They can be Treasury bonds, municipal bonds, or corporate bonds, depending on the issuer.
Bond Funds: Bonds that make periodic dividend payments based on the interest that is paid from the individual bonds, as well as being primarily invested in individual bonds.
Fixed Income ETF’s: This particular bond is traded as a single unit through the day as well as offering exposure to the U.S. and international bonds.
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