What Bonds are All About Articles | Investing

By: Guy Starbuck

A lot of investors have heard about bonds but not everyone invests in such financial devices. A number of people on other hand may invest in bonds without being aware of what bonds really are and how they work to their advantage. In order to take complete of bonds as a financial instrument, it is important to learn what exactly bonds are and why they are useful in terms of an investment portfolio. Bonds are useful in a lot of ways and they are not so complex that they cannot be utilized by those who are new to the investment game.

A bond is a type of ‘IOU’ where an investor agrees to loan money to a particular company or to the government, in return for an interest rate that is usually fixed. This is sort of like taking a loan from a friend to purchase something which you want right now only to pay them back with interest at a much later date. The beauty of this sort of investment is that you are guaranteed a return come rain come shine. You may loan money to a friend without any certainty that you’ll get your money back but in the case of bonds, they are as good as gold, especially when they are government-issued bonds.

Businesses are usually in need of funds at different times so they tend to issue bonds on a regular basis. This is because a business may grow and not always have enough cash to support its operations during growth. In this case if the company in question is a financially reputable one with a good credit rating with major financial institutions, it may then issue bonds in order to cope during its growth period. Bonds are usually issued for a specific amount of time such as 90 days, 1 year, 5 years etc. If you buy a 5 year bond from a company what this means is that in five years you’ll get your money back in addition to some interest.

Bonds do not really give the sort of significant return which stocks do but there are many good reasons to invest in them. The first of these reasons is that bonds are very reliable, you can be pretty sure that you’ll get back what you invested and more. One more reason why bonds are attractive to a number of people is that they tend to pay certain fixed amounts in various time intervals. This is usually a great idea for a person looking for some extra cash flow during their retirement period or someone who requires steady cash flow at regular times. Unlike stocks, you don’t have to bother about the risk factor and you also don’t have to bother whether you are going to make a profit or loss. You will eventually make money, the question is how much and although it won’t be as large as a profitable stock investment, at least you can guarantee that you will have the funds in question on a particular date.