Bonds! What are they you ask?
Well, by definition, a bond is:
So when you look at it like this, when talking about investments, a bond is a debt instrument that allows one party to borrow money from another. This is a legally binding agreement that allow borrowers to raise money for their businesses. Bonds can be from the government, municipalities and even corporations.
So why would I buy a bond?
With bonds, you are promised to be paid back for the money you lend out, plus interest.
Think about your investment like this: I give you $10,000 of my money. You promise me a 5% interest rate paid yearly for 5 years. You will pay me this $500 interest per year for 5 years, and when it is done, you must pay me back the original $10,000 you borrowed from me.
I just turned my $10,000 into $12,500 after 5 years. Not bad!
Buying bonds are a great way to secure your hard earned money while earning a great return in the form of interest income.
What are the risks of buying a bond?
You see, bonds are a great, secure investment. However, you should always do your due diligence when investing in individual bonds. Why?
Companies and governments can fail: it's possible. Some of the biggest companies in history have gone down because of fraud, scandal or simply because the business is not sustainable anymore.
Now if the company or government you loaned your hard earned money to fails and goes bankrupt, you will lose your money! But good news: this IOU comes ahead of other investors, like stock investors!
If a company goes bankrupt, whatever cash or assets are left, bondholders are some of the highest on the food chain to get those final assets of the company.
In summary, bonds are a great way to invest in a secure investment that gives you better piece of mind that your money will be returned at the end of the contract.
Who wouldn't love bonds?