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What are
Bonds?
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Why invest in Bonds?
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Key things to consider before buying
Bonds.
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How to read a Bond Table
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Major types of Bonds
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Other types of Bonds
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Secured vs. Unsecured Bonds
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U.S Savings
Bonds: An American institution
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How & Where to buy EE
bonds:
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How to purchase Bonds
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Key terms and concepts of Bonds
Bonds:
What are bonds?
A bond is a debt security, similar to an I.O.U. When you purchase a bond, you
are lending money to a government, municipality, corporation, federal agency or
other entity known as the issuer. In return for the loan, the issuer promises to
pay you a specified rate of interest or coupon, usually but not
always at fixed rate during the life of the bond and to repay the face value of
the bond (the principal) when it matures or comes due. The issuer
also promises to repay the debt on time and in full. Because most bonds pay
interest on a regular basis, they are also described as fixed-income
investments.
You can think of a bond in the context of a mortgage, we
usually need to borrow when we buy a house. Corporations and governments also
need to borrow money but few banks can afford to lend millions of dollars to one
single corporation or government. A solution to this problem is to issue bonds
and other debt instruments in a public market, where thousands of people lend a
small portion of capital to the issuer until them issuer gets their desired
amount.
Just like your mortgage, when you buy a bond and
loan your money to the borrower there is also a pre-specified period of time
they have to repay your loan, this is the maturity date.
In most cases the bond’s face value or par value is
$1,000, this is the amount the borrower will pay you once the bond matures. The borrower must also pay you a predetermined interest rate
in exchange for using your money. These interest payments are usually made every
6 months until the bond matures on the maturity date. There are some exceptions to this such as
zero coupon
bonds which instead give you a large lump-sum
payment once the bond has reached maturity.
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It is important to know that interest payments are not the only way you can
profit from bonds. Publicly traded bonds often fluctuate in price, similar to
stocks, therefore it is possible to have a
capital gain
(or loss) once you sell the bond or once it matures. The price you pay for a
bond is based on a whole host of variables, including interest rates, supply and
demand, credit quality, maturity and tax status. Newly issued bonds normally
sell at or close to their face value of $1,000. Bonds traded in the secondary
market, however, fluctuate in price in response to changing interest rates. When
rates rise, new bonds issued today pay higher rates than otherwise identical
bonds issued in the past. When interest rates rise, bond prices fall. And
conversely, when interest rates fall, bond prices rise.
When the price of a bond increases above its face value, it is said to be
selling at a premium and when a bond sells below face value, it is
said to be selling at a discount.
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Why invest in bonds?
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