Bonds – also known as fixed income instruments – are used by governments or companies to raise money by borrowing from investors.
Bonds are typically issued to raise funds for specific projects. In return, the bond issuer promises to pay back the investment, with interest, over a certain period of time.
From the seller’s perspective, selling bonds is therefore a way of borrowing money.
From the buyer’s perspective, buying bonds is a form of investment because it entitles the purchaser to guaranteed repayment of principal as well as a stream of interest payments.
Some types of bonds also offer other benefits, such as the ability to convert the bond into shares in the issuing company’s stock.
The bond market tends to move inversely with interest rates because bonds will trade at a discount when interest rates are rising and at a premium when interest rates are falling.
Bonds are an important piece of an investment portfolio’s asset allocation since the steady return from bonds helps offset the volatility of equity prices.
Many people believe that treasury bonds can be a good investment for those looking for safety and a fixed rate of interest that’s paid semiannually until the bond’s maturity.
However, not everyone agrees with this. In this video, Warren Buffett explains why he thinks a long-term bond is a terrible investment.
Source: Finance Jane (Shared via CC-BY)