What are bonds, types
Do you want to invest in bonds? Learn the correct method of investment as well as bonds definition and different type of bond.
What is a bond
Bond (also known as debt securities, debt obligations, bills or notes) is nothing but a debt security. When individual needs money then he borrow loan from bank or any other financial institution. Similarly when any large scale company or organization needs money then it issues bonds. Since capital requirement of such companies or organizations is more and average banks are unable to feed them with such huge amount, thus company sell bonds to public market. Thus thousands of investors lend money to them.
Bonds are a source of fixed income as the person is aware that how much money he will get the expiry of maturity date. Of course, no investor will lend money to anybody without any benefit. Thus companies pay them interest at a predetermined rate. The features of bond and terminology of bonds is that company or organization issuing bond is called 'issuer', interest rate paid is termed as 'coupon', principal amount borrowed by company is termed as 'face value' of bond and the date on which the amount such borrowed will be repaid by issuer is termed as 'maturity date'.
For example: If you buy a bond of face value of Rs. 10,000, coupon of 10% for maturity of 5 years. thus it means that he will get Rs. 1000 as interest per year for next 5 years. at maturity date, you will get Rs. 10,000 back.
Such people confuse themselves between bonds and shares since both of them are securities. But the basic difference between these terms can be understood as: bonds are debts while shares are securities. Share holder is having share in ownership of the company and has a share in its profitability whereas bond holder has lent money to company and company is debtor to bond holder. Thus, he becomes creditor of the company and is entitled to only his principal and interest amount without any share in profitability. In case of bankruptcy before maturity date, bond holder will be paid prior to share holder. Types of bonds
- Municipal Bonds
- Zero Coupon Bonds
- Fixed rate bonds
- Floating rate notes
- Inflation linked bonds
- Build America Bonds (BABs)
- Corporate bonds
- High yield bonds
- Treasury bond
- Asset Backed Security (ABS)
- Mortgage Backed Security (MBS)
The interest rate on your bonds will stay solid as long as that is the type of bond you purchased. Some bonds have step rates or zero coupon rates. However, it sounds like you are buying a regular bond that has a fixed percent with a fixed term. Each day, the market price of the bond fluctuates based on its selling and buying values. As long as you hold it to maturity, none of this matters. The only down side for a bond these days is the solvency of the company. Like Lehman Bros. Their bond holders just received a notice that they will get $600 from a $5K investment. Bonds are a fab investment right now. Best investment is a mid term bond that would be held for five years. You can get some good ones out there with a term of five years with a 7 plus percentage return. Anything over five years, plan to hold them for a while. Eventually interest rates will go up and if you need to sell your bond, you may not get the full value.