Understanding The Ins And Outs Of Bonds

A bond is a legal agreement between an investor and a company or a certain institution wherein the investor issues debt that can either have a variable or fixed interest rate.   It is issued by a company, state government, or the federal government to an investor. A bond is a formal agreement for a company’s debt with a specific interest paid within the arranged time frame.  The set date when the company is supposed to pay for the whole amount is called the maturity date. 

A government, municipality, an institution, or a corporation can issue a bond.  Whether it is for expansion, building project, new stadium, or just restricting existing debt, they can borrow a specific amount of money from an investor.

There are many types of bonds with varying characteristics and features, such as zero coupon and convertible bonds.  Anyone can also invest in bonds, by simply lending money to a specific company who needs some kind of financial assistance.  It is called an investment because the original loaned amount increases over time due to interests which have different rates depending on the contract and the type of bond it is. 

The borrower, in return, can invest the money into something that will bring him more money, pay the total amount and interests at the soonest possible time, and get on with the business without worrying about other debts.  On the contrary, a bond investor is able to invest his or her money without having to actually be involved with the company or an institution that borrow his money and their day to day operations. 

Unless the company who has a debt goes bankrupt, the investor is most certain and definite in getting back more than the invested amount.  This is why in the corporate world, investing in bonds is somewhat the same as investing in stocks.  Also, people who want to reduce their taxes can get certain advantages from investing in specific types of bonds such as municipal bonds which are normally exempt from certain taxes. Therefore, you will receive an additional amount of money without having to pay any tax for it. 

Bonds also have the added benefit of paying bond holders a routine amount of interest either monthly or quarterly. Many investors, especially older ones, find themselves depending on this money in retirement as a separate stream of income.