What Is A Bond?
“If you give someone money to purchase a house, that
loan is called a mortgage. If you loan money to the U.S. Government,
utility companies, or even your local village, that loan typically
takes the form of a bond issue.”
- Ilyce R. Glink, author of
100 Questions You Should Ask About Your Personal Finances
A bond is essentially a loan to the government or corporation
on which you earn interest, and the issuer promises to pay
you back in full by a certain date--known as the date of maturity.
Government bonds offer the greatest degree of security, as
they are backed by the “full faith and credit” of
the U.S. Government. It’s entirely unlikely the U.S.
Government will default on repayment of this loan. If it does,
your paltry bond will probably be the least of your worries.
Bonds are generally referred to as “fixed-income investments”
because they make regular interest payments up until the date
of maturity. The longer a bond’s maturity, the more its
price will be affected by fluctuating interest rates. To compensate
for the greater price risk, long-term bonds generally offer
higher interest rates than intermediate or short-term bonds.
Over time, bonds have generally proven to provide higher
returns than cash investments and to perform ahead of inflation.
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What
is a Bond?
