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What Are Bonds?

Updated: Mar 7, 2021

When we think of investments, the first that comes to mind is stocks. However, there are a huge variety of other investments. This article will discuss the basics of bonds.

 

Bonds are investments that are sold to raise money for companies or the government. Interest, called coupon payments, are paid on each bond. The total amount of interest paid per share after a certain amount of time, but the percentage changes to reflect the value of the bond. After a period of time, the issuer of a bond has to pay back the principal, or the value that the bond was bought at, to the investor. When this occurs, a bond has matured.


Investors purchase bonds mainly for financial security. Bonds guarantee a steady stream of coupon payments to their investors. Typically, bonds and stocks have an inverse relationship; meaning that when one goes up, the other goes down. By diversifying their investment portfolio, investors are able to gain a fixed income when the stock market is down.


There are three main types of bonds:

  • Corporate Bonds

  • Municipal Bonds

  • Treasury Bonds

Corporate bonds are issued by corporations to raise money for operations and projects. Companies may issue bonds when they do not want to sell shares their business.


Municipal Bonds are issued by local governments. They are used to fund community projects which include parks, roads, and infrastructure. Municipal Bonds are also known as munis.


Treasury Bonds are issued by the US Treasury Department. This type of bond takes a long time to mature, taking up to 30 years before being paid back. Because of this, Treasury Bonds are able to be traded before they reach maturity.

 

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