|
Bonds are basically loans that you make to a municipality,
government agency, or corporation. Bonds provide a balance
when combined along with stocks and are known to fluctuate
less than stocks. You earn an interest rate for the loan term
while the borrower receives the cash it requires. The borrower
makes a promise to make a payment of a certain specific
interest rate for a period of time on a regular basis.
The loan agreement includes factors like principle, rate of
interest, schedule of payments, and loan term (until principle
is repaid). Let’s say you purchase a $1,000 bond while paying
an interest rate of 8% every year for a period of 20 years,
you would be entitled to receive $80 yearly in interest
payments for the bond period which you hold. Bonds are often
referred to as “fixed-income investments” because of the
steady and predictable interest stream. It can be purchased
and sold during open market, just like stocks. When the bond
becomes more mature, the borrower repays the original bond
price. The market value will be based on interest rates that
are currently going on in the economy.
Bonds have certain risk involved; most are related to credit
quality and interest rates. One of the biggest risks of
investing in bonds is if the issuer goes bankrupt, and the
bond would not be repaid at all. During higher interest rate
periods, bond prices usually drop. They are basically
susceptible in economic related climates with growing interest
rates. For a more in depth article on Bonds, visit:
http://www.russell.com/ |
|
