Bonds

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    BondBonds are debt instruments, which means they are a way of borrowing money.

    The entity ‘issuing’ the bond (i.e. selling the bond) pays back the money to the entity/investor purchasing the bond with some kind of interest.

    Bond issuers are typically a corporation or a government that wishes to raise money for a specific purpose.

    The period they borrow the money for is usually a predetermined period (also called maturity), at a fixed interest rate (also referred to as a coupon of yield). Bonds are also commonly known as fixed-income securities.

    If the entity that issues the bond is considered to be at high risk of defaulting on the repayments to the lender, then they will have to pay a higher interest rate than a less-risky entity would.

    Bonds are graded in terms of how risky they are. The highest credit rating is AAA, meaning that the risk of defaulting is minimal. The lowest grade a debt instrument such as a bond can have is junk status. These bonds are called junk bonds.

    Although bonds and stocks are both securities, they are different in that, as a shareholder, you own a part of a company, whereas as a bondholder, you only lend money.

    As a form of investment, bonds can play an important role when building your portfolio.