Bonds

Bonds are financial instruments representing debt. They are essentially loans made by investors to borrowers (typically corporations or governments). In exchange for the loan, the issuer promises to pay the bondholder a fixed rate of interest (the coupon) over a specific period, and to repay the principal amount (face value) at maturity. Bonds are considered a relatively low-risk investment compared to stocks, as they have a higher claim on assets during liquidation. Various types exist, including corporate bonds, government bonds, and municipal bonds. Bond yields are influenced by factors like credit risk, interest rates, and inflation.

Bonds meaning with examples

• The company issued corporate Bonds to raise capital for a new factory, attracting investors with the promise of a consistent interest income. Their strong credit rating allowed them to offer favorable terms. Many financial analysts buy Bonds because it is perceived as safe, and it guarantees the investor to receive returns for their investments, this is a good passive income to have.
• During times of economic uncertainty, investors often flock to government Bonds, which are perceived as a safe haven asset. Their lower yields might not always be a great short-term solution, but the returns are guaranteed for long-term investors. The government guarantees to repay the principal amount invested.
• The city used municipal Bonds to fund the construction of a new public library, offering tax-exempt interest to residents, encouraging local investment. The lower yield of municipal Bonds is a good trade-off for the investor, as it encourages infrastructure development, and at the same time, is tax-exempted.
• The portfolio manager diversified their investments, allocating a portion to a bond fund to reduce overall risk. A bond fund is a safe haven and mitigates the risks associated with market fluctuations. A common approach to investing is through diversified portfolios to reduce risk.
• Rising interest rates caused the price of existing Bonds to decline, as newly issued Bonds offered higher yields, impacting the fixed income market. Bond prices and interest rates have an inverse relationship. Investors have the option to buy newly issued Bonds to get higher returns, thus reducing the value of already purchased bonds.