As an Economics student, I remember learning about bonds by thinking of them as a simple ‘I.O.U’.
I.O.U an explanation...What is a bond and how does it work?
A bond is a fixed income instrument (meaning it provides returns in the form of regular, or fixed, interest payments).
Instead of going to banks, governments and companies borrow money from investors so they are able to finance projects and operations. As part of that I.O.U, the borrower (usually governments and companies) pay back a fixed amount of interest each year, as well as returning the initial amount of the bond when the loan period comes to an end.
A lot of people prefer bonds as they are perceived to carry a lower risk than publicly-traded stocks.
Why?
Bonds deliver a fixed rate of interest income that is paid regularly to investors, which is very different to stocks & shares. When you purchase a share of a company, the company has no obligation to make any payments to you as an investor.
That’s all well and good, right?
On the surface, it sounds great. But the truth is as investors in a bond, you have very little control over what your money is being used for i.e what governments and companies will be borrowing your money. So, you may be getting healthy returns (great) but your money could be funding fossil fuel extraction, paying people below a healthy wage and all the other bad things that harm the future of the planet (not so great).
So, there's pros and cons to a bond but with all investing there is no guarantee that you will make a return on your money.
Fempire Finance