A bond is a debt investment in which an investor loans money to an entity which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are debt holders, or creditors, of the issuer.
Features:
- Set Maturity Dates: Bonds have set maturity dates that can range from one to 30 years — short-term bonds (mature in three years or less), intermediate bonds (mature in three to ten years) and long-term bonds (mature in ten years or more).
- Interest Payments: Bonds typically offer some form of interest payment; however, this depends on their structure: “Fixed Rate Bonds” provide fixed interest payments on a regular schedule for the life of the bond; “Floating Rate Bonds” have variable interest rates that are periodically adjusted; and, “Zero Coupon Bonds” do not pay periodic interest at all, but offer an advantage in that they are can be bought at a discounted price of the face value and can be redeemed at the face value at maturity.
- Principal Investment Repayment: Bond issuers are obligated to repay the full principal amount of a bond in a lump sum when the bond reaches maturity.
- Credit Ratings: You can evaluate the “default risk” (the risk that the issuers won’t be able to make interest or principal payments) of a bond by checking the rating it has been given by a bond rating agency such as Moody’s Investors Service or Standard and Poor’s.
- Callable Bonds: If the bond has a “call feature”, the issuer is allowed to redeem the bond before its maturity date, repay the loan and thus, stop paying interest on it.
- Minimum Investment: Bonds are usually issued in $1,000 or $5,000 denominations.
