What is a Bond?
If we look into the historical figures of bonds the long term bonds averaged 5.4% rate of return from 1928-2011 and the stocks return averaged 11.2%.
So it’s as important to know about the bonds as stocks or Mutual funds.
A bond simply means; an agreement that you are lending someone else money. It could be taken from the government or from a company. The borrower must pay back your loan and interest rate. It has 3 terms which are related to it.
Par or face value is the amount that a bond is issued for. Also, par value is the amount you get back when the Bond matures.
The term is the duration of the bond.
Coupon rate or Interest rate – Amount of money you get back every year as a percentage of the par value. Also known as the rate of return.
One might expect that an Unhealthy company will issue a bond at a higher interest rate.
Bonds are preferred when interest rates are high and inflation is low. Because inflation diminishes the fixed income received from Bonds.