What are bonds

Many people don’t know the distinction among stocks and bonds. It happens to many people that even those who invest in these types of securities through any retirement plans or personal investment accounts can’t in fact know what the differences are.

A corporation or government assuring payment of the original investment with benefit interest by a specific future date issues a certificate of debt called bonds. Principally, one is making a loan to the government or corporation and gets compensated with an amount of money in the future for letting the government or corporations borrow the money. Bonds are another way the government raises money other than taxes. The function of bonds is to provide an income stream.

Bonds signify loans made by investors to companies and other entities that have issued the bonds to catch the attention of capital without giving up managing control. Bondholders do not share in a company's profits. Rather, they get a fixed return on their investment. This return, stated as an interest rate on the bond, is called the "coupon rate" and is a profit of the bond's original offering price.

Bonds are issued for particular time periods. When the bond expires and the original investment is returned, the bond is said to have matured. Bonds can take as long as 30 years to mature. Time to maturity and the issuer's ability to make good on its payment responsibility are the two mainly important factors in selecting individual bonds to purchase. Every bond carries the risk that a promised payment will not be made in full or on time. As uncertainty of repayment rises, investors require higher levels of return in exchange for assuming greater risk.

Bonds, similar to common stocks, fluctuate in market value and, if sold prior to maturity, may produce a gain or a loss in principal value.