What is a Bond?
A bond is actually debt issued by a corporation, municipality or other taxing authority, the federal government, or a foreign government. When you buy a bond you are in effect loaning money to the bond issuer. For example, if you bought a $10,000 corporate bond from Ford Motor Company, you would actually be loaning $10,000 to Ford pursuant to the terms associated with that particular bond. Most bonds have a definite maturity and interest rate assigned to them.
Bonds normally pay interest based on their par value and the interest rate that has been assigned to that particular group of bonds. For example, a $1,000 par value corporate bond that has an interest rate, or coupon rate, of 7% would generate income of $70 of interest income per year. Most corporate bond interest payments are made at six month intervals. Certain bonds do not make any interest payments. They are called zero coupon bonds.
Most bonds have an assigned maturity date at which the bond will be redeemed by the company and the par value of the bonds will be returned to the bond holder.
Bonds constantly fluctuate in value and may be worth more or less than what was originally paid for them if they are sold prior to their maturities. Factors that influence the value of a bond are its coupon rate, financial health of the issuer, bond ratings, economic conditions, interest rate levels, coupon rates, etc.
It is not certain that a bond issuer will be able to make interest payments on a timely basis, or at all, or that they will be able to return the par value of the bonds at the stated maturity date or ever. However, bonds are classified as liabilities to corporations and if a company goes bankrupt bondholders are entitled to make a claim against the assets of the company that issued the bond. One measure of a bond's safety or ability to make its interest and principal payments is its bond rating.
Most individuals invest in bonds for their income. However, some investors others see certain types of bonds to be vehicles that may provide growth and income, or even growth.
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