What is a Bond?
Bonds are a type of investment that can be used to fund projects, raise capital for businesses, or provide a steady stream of income. Bonds are a form of debt, where an investor loans money to a borrower, and the borrower agrees to pay back the loan with interest at a predetermined rate. Bonds can be issued by governments, corporations, or other entities, and can have various terms and tax advantages.
The Basics of Bond Investing
Bonds compete with stocks for investors' dollars, and when yields go up, equities often go down. Bonds are debt instruments, which means that an investor is essentially loaning money to a borrower, such as a company or government. In return for the loan, the borrower pays interest to the investor. The borrower also agrees to repay the loan, plus the interest, either at maturity or over a period of time.
Investors can buy bonds directly from the issuer or through a broker. When buying bonds directly from the issuer, the investor is essentially lending the issuer money and is at risk of not getting repaid if the issuer defaults. When buying bonds through a broker, the investor is essentially buying the debt instrument from a third party, and is not at risk of losing money if the issuer defaults.
March 1 (Reuters) - Strong investor inflows into bond markets this year mean traders and bankers are confident the European Central Bank and other central banks will provide enough stimulus to keep bond yields low. Bond yields are a key measure of the return an investor can expect from a bond.
Bond math isn't always intuitive, but a basic understanding of it lies within most investors' grasp and can help them stay the course in today's low-rate environment. Bond yields are a reflection of the level of interest rates, and when rates are low, bond yields are typically low. When interest rates are high, bond yields are usually higher.
Investors who rightly abandoned bonds when yields were stupidly low should add them back as ballast to their portfolio. Even after their big run-up, yields remain low, and bonds remain a key source of income in a low-rate world.
Types of Bonds
There are several types of bonds, each with its own set of features and benefits. These include government bonds, corporate bonds, and mortgage-backed securities. All of these bonds pay interest in exchange for your money, and can be used as a way to diversify your portfolio and generate income.
Government bonds are issued by governments, such as the U.S. government and are considered to be the safest of all bonds. No stock or bond is risk free, but Treasuries are often referred to as such because they are backed by the full faith and credit of the government.
Corporate bonds are issued by corporations and are considered to be a bit risk than government bonds. Corporate bonds can offer higher yields than government bonds, but also come with greater risk of default.
Mortgage-backed securities are a type of asset-backed security that is backed by a pool of mortgages. These securities are also considered to be a bit risk than government bonds, but can offer higher yields.
Green Bonds
The rules will enable investors to identify high quality green bonds and companies, thereby reducing greenwashing or exaggerated environmentally friendly claims. Green bonds are a type of bond that is issued with the purpose of financing projects that have an environmental benefit.
I Bonds
I bonds are a type of savings bond issued by the U.S. Department of the Treasury. These bonds work by accumulating interest monthly. That interest is added to the bond's value and is then paid out when the bond matures. I bonds also provide a measure of protection against inflation, as they are adjusted each year based on the Consumer Price Index.
Tax-Exempt Bonds
Bonds Can Be Taxable or Tax-Exempt. The market for bonds sold by the state and local governments is called the municipal bond market. These bonds are issued to finance public projects such as schools, roads, and public buildings. Municipal bonds are generally exempt from federal taxes and may also be exempt from state and local taxes depending on the state in which the investor resides.
Extract Anonymous Image Description: A chart showing the different types of bonds and their associated features.
