Bonds are loans that you, as an investor, can buy from companies or governments who have issued them. One reason for doing so is the need for temporary financing by the organizations and the need for safe returns by an investor.
This means when bonds are first issued, they are bought directly from the issuer in need of a loan. The price you pay for the bond is their temporary loan. In return for the service, you receive annual interest called the coupon rate.
Every bond has an expiry date, at which point your money is returned. However, as we operate in a free financial market, most bonds are bought and sold from other investors, not the original issuer.
This makes for bonds to have another possible means for investors to make money. Which is to simply buy and re-sell at a later stage, when the market is favourable.
Similarly, you could be (one of) the first holders and decide to sell when an increase in value has occurred. This depends if you believe the return now, is more valuable than a potential slightly higher one in the more distant future.
Calling a bond
One of the important aspects of a bond is whether or not it can be called. A called bond means there is at least 1 opportunity, for the issuer to prematurely pay back their loan, therefore return your investment.
This matters in the case that you are hoping to re-sell, when bought above market value, expecting it to rise more before maturity. If the call is then made years early, you might realize a loss.
On the flip side, one major advantage of bonds is that they are one of the lowest risk financial products you can invest in. This is thanks to the governments backing many, as well as triple-A companies. Compared to stocks & ETFs, bonds always win the lowest risk price.
A very specific type of government bond (TIPS) even works counter inflationary. Meaning the interest rate on the bonds mirrors the rise and fall of inflation. This way, your investment does not need to be adjusted for inflation to calculate net return.
inaccesable to some
Bonds can offer a true challenge to the beginning investor if the said investor isn’t ready or comfortable to put down a sizeable sum of money. Generally speaking, bonds can only be bought in larger lot sizes forcing smaller time investors to look elsewhere.
Yet in the best theoretically diversified portfolios, bonds still play a massive role to offset losses in other product types, should the market fall.
Pulling it all together
Bonds are effectively loans that investors buy for a return over time in interest rates & possible market returns if sold before maturity. Some bonds are possible to be called, which makes their value more important, should you wish to re-sell them.
Bonds are safer compared to stocks & ETFs. They can help to counter inflation and provide a steady return year on year. Not everyone can access bonds thanks to the higher minimum initial investments required.
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