Investing in Bonds

If you are looking for a consistent return on investment without worrying about the ups and downs of the stock market, you might want to consider investing in Bonds.

Bonds typically have lower returns than stocks, ETFs, and mutual funds, but have a consistent interest payment to their investors every year – usually much better than you would get with your savings account.

There are three major types of bonds:

• Corporate Bonds, which is debt issued by individual companies. Many large companies prefer to issue bonds instead of more stock because stock gives a piece of ownership of the company. Once a company pays off the bond, it disappears, and the current owners keep their shares.
• Treasury Bonds, which are issued by the US Federal Government. This is the “National Debt” you have heard so much about – you can buy a piece and earn a return on your investment.
• Other Government Bonds – States, Cities, Counties, and just about every other government issues their own bonds too. These are usually riskier than Treasury bonds (and are harder for an individual investor to buy directly), but usually have a higher return.

If you have a brokerage account, you can usually buy bonds directly through that channel. Many mutual funds hold some bonds as well to maintain a good risk ratio, so some investors hold bonds without even knowing it!

Bond Prices

When bonds are first issued by a company or a government, they have a “face value” which is typically $1,000 and a stated interest rate or “coupon rate” that they pay to the holder of the bond.  That interest rate is determined by the interest rate markets at the time the bond is issued.  Once you hold a bond, you can keep holding until “maturity” (meaning the bond has expired and all payments have been made) or you can sell it to other investors. Since bonds pay a fixed interest rate, the market price of bonds change as the prevailing interest rates change.

If interest rates rise, bond prices fall – because bonds have a fixed interest rate that they pay.  If a bond issued last year pays 5% and a bond issued this year pays 6% people would sell the 5% bond and buy the 6% bond.

Likewise, if interest rates fall, bond prices increase.

Now that you know a bit more about Bonds, close this lesson to continue the game!

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