What Are Bonds, and Why Should I Care About Them?


When you were a kid, you might have received a savings bond on your birthday. When you heard they were worth $100, your ears perked up. After all, $100 can buy a whole lot of toys and video games.

That’s when your parents brought you back down to Earth. While that bond said $100, it wasn’t actually worth $100 for a loooooong time, and you wouldn’t get to spend it until you’re older. You had to wait at least a decade, and who knew if your favorite Power Ranger would still be in stock by then?

That’s the premise behind bonds. You pay a corporation or the government money on loan for a set amount of time. When that time is up, however, you’re guaranteed to earn your original loan amount back — plus a little extra.

Bonds are ways for corporations and the government to raise money through debt.

Shutterstock
Shutterstock

Corporations use them instead of going to the bank for a loan. The government uses them to fund projects for the public, among many other things.

Like stocks, you invest in bonds by paying a set amount of money per bond to the entity issuing the bond.

what-are-bonds-2
United States Treasury, Bureau of Public Debt [Public domain], via Wikimedia Commons

Unlike stocks, however, your investment comes with a much lower risk.

Shutterstock
Shutterstock

This is because you’re guaranteed either a fixed or variable amount of interest — extra money owed to you in addition to your initial investment. Stocks go up and down all the time. Bonds only go up, but not at exponential levels.

To get this interest, you must wait a certain number of years to cash in the bond.what-are-bonds-4

This could range anywhere from one year to thirty years, depending on the agreement set during the purchase. Your bond will earn interest on it during set intervals — months or years during the bond’s duration — leading to a slightly larger sum of money paid out when the bond fully matures (or generates its maximum interest for the intended length of the bond).

Your interest is guaranteed unless the bond issuer is unable to pay, like during a company’s dissolution.

Flickr/Jon Collier
Flickr/Jon Collier

You can also sell the bond at a lower price you bought it for, which would constitute a loss. You could also cash out the bond before it matures, which might come with penalties and losses.


If you want to invest in a government or corporate bond, you simply need to know how much you’re investing, what your interest rate will look like during the duration of the bond, and when the bond matures. Once you have this all figured out, you’ll be on your way to earning yourself a nice little earnings bump in the future, all while avoiding the ups and downs of the stock market.

Share this knowledge with your friends below, and maybe see if your parents still have your old bonds in the attic.


186 Comments

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