Introduction to Bond

Introduction to Bond.

Definition. A bond is written and signed promise to pay a certain sum of money on a certain date. A bond is a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate (Coupon Rate)..

Types. The Bonds can be categorised into four variants: Corporate Bonds Municipal Bonds Government Bonds and Agency Bonds ..

What is a corporate bond?. A corporate bond is a type of debt security that is issued by a firm and sold to investors. The company gets the capital it needs and in return the investor is paid a pre-established number of interest payments at either a fixed or variable interest rate. When the bond expires, or "reaches maturity," the payments cease and the original investment is returned..

What is a municipal bond?. A municipal bond is a debt security issued by a state, municipality, or county to finance its capital expenditures, including the construction of highways, bridges, or schools. They can be thought of as loans that investors make to local governments. Municipal bonds are often exempt from federal taxes and most state and local taxes (for residents), making them especially attractive to people in higher income tax brackets..

What Is a Government Bond?. A government bond is a debt security issued by a government to support government spending and obligations. Government bonds can pay periodic interest payments called coupon payments. Government bonds issued by national governments are often considered low-risk investments since the issuing government backs them..

What Is an Agency Bond?. An agency bond is a security issued by a government-sponsored enterprise or by a federal government department other than the U.S. Treasury. Some are not fully guaranteed in the same way that U.S. Treasury and municipal bonds are. An agency bond is also known as agency debt..

What Are the Advantages of Bonds?. First and foremost, bonds provide investors with a way to diversify their portfolio and help protect themselves from market swings. Different asset classes might respond differently to economic conditions, and bonds may do well when other types of investments—such as stocks and real estate—fall, which could potentially provide a safety net over time..

What Are the Advantages of Bonds?. When you buy a bond, you’re essentially lending money to the entity that issued it, and you’re betting they’ll pay you back as promised. If your bonds are highly rated—i.e., the ratings issuers believe the entity is financially strong enough to repay the debt—they are generally considered a lower risk. Because bond issuers are repaying debt over time, bonds can also provide steady income, which can be a real benefit if you’re looking for a predictable stream of money—for instance, to help with living expenses in retirement..

What Are the Disadvantages of Bonds?. Although bonds provide diversification, holding too much of your portfolio in this type of investment might be too conservative an approach. The trade-off you get with the stability of bonds is you will likely receive lower returns overall, historically, than stocks. Hence, the percentage of bonds in your investment strategy depends on how much growth potential you’re seeking over time..

Some other types of bonds are. Personal Bond High Yield Bond Convertible Bond Perpetual Bond Bearer Bond (unregistered Bond) Registered Bond War Bond.

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