Bonds are a method which companies and governments use to obtain funding. Bonds are essentially a loan from the owner of the bond to the issuer of the bond, a company or a government. One can also view a bond as similar to an IOU given to the lender which in this case is the investor.
What Do Bond Investors Gain?
Just like with a bank loan, no investor would loan his or her money for no gain. Investors receive interest payments at a predetermined rate. These payments, known as the “coupon”, are made at a specified schedule. The date that the bond issuer is obligated to repay the amount borrowed is known as the “maturity date”.
Adding Up the Numbers
It is important to understand exactly how the numbers add up when purchasing a bond. For instance, if a person purchases a bond that has a $1,000 face value, an 8% coupon and a 10-year maturity date, the person may want to know exactly how much he or she will receive and when. This person will be set to receive $80 total in interest payments over a period of ten years. One can calculate total interest payment obtained by multiplying the face value by the coupon. In this example, after ten years this person will receive back his or her $1,000.
Bonds are generally considered some of the safest financial investments available. However, this does not come without some type of cost. In this case, it could mean the cost of earning larger and faster profits via investments in stocks or futures. On the other hand, every person has his or her own goals for investing. Therefore, the balance between safer financial investments, such as bonds, and more risky investments should reflect each person’s individual goals.
Le Bach Pham has been writing professionally after receiving his Bachelor’s of Art
in English Literature from the University of California, San Diego in 2002. He now specializes in writing about legal, business and financial topics. Pham also earned a Paralegal Certificate from the University of San Diego and has experience working in the legal field. He also has experience in writing business plans for clients from various fields, including banking, finance, retail, education, beauty and various other sectors.