Bonds are always popular investments when stocks are not. The worse the economy is, the more people ask how do bonds work. When times are tough, like they are right now, people need more guarantees in their investments. By inquiring into bonds and asking questions about how do bonds work, they hope to find better places to put their money.
There is not just one type of bonds, as you will learn when you study how do bonds work. Although, the specifics of each type of bond affect your bond investment, you need to learn the basics of how do bonds work before you even consider what type of bonds to invest in.
Bonds, unlike stocks, are debt securities. When you buy a bond, you are lending money to the bond issuer. In return, the issuer pays you interest and promise to pay back the principal at the end of the life of the bond. Each bond has a face value which is $100. The face value is sometimes referred to as par value.
Once issued, bonds can be traded at par, at discount or at premium. You can buy bonds that are priced at discount or priced higher than the par value. No matter how much you paid for the bond, you will still only get the par value back at redemption. That means if you over pay for the bond, you may be losing money in the end.
When people learn about how do bonds work, they are particularly interested in the interest rates or the coupon that bonds pay. Most bonds pay interests regularly such as monthly or quarterly or annually. Bonds that pay more interests are often desirable because people want regular income from their investments.
The interest rate of a bond is sometimes referred to as the coupon rate of a bond. The higher the coupon rate, the more attractive the bond is but high coupon rate does not always mean good investment. Investors that know how do bonds work will not only look at the coupon rate but more on the bond yield.
A bond with higher yield is more desirable than a bond with higher interest rate or coupon rate. For example, if you buy a bond at a premium price, paying much more than what you are going to get back, then even if the interest payments are high, they may not be high enough to offset the higher price that you paid.
Bond investing can be simple or complicated. There are complicated bonds and there are simple bonds. In learning how do bonds work, you will find out what types of bonds are easy to invest in and which are not. Finding out how do bonds work will also help you calculate the bond yield so that each time you want to invest in a bond, you can be sure that you will get the most money out of your investment.
There is not just one type of bonds, as you will learn when you study how do bonds work. Although, the specifics of each type of bond affect your bond investment, you need to learn the basics of how do bonds work before you even consider what type of bonds to invest in.
Bonds, unlike stocks, are debt securities. When you buy a bond, you are lending money to the bond issuer. In return, the issuer pays you interest and promise to pay back the principal at the end of the life of the bond. Each bond has a face value which is $100. The face value is sometimes referred to as par value.
Once issued, bonds can be traded at par, at discount or at premium. You can buy bonds that are priced at discount or priced higher than the par value. No matter how much you paid for the bond, you will still only get the par value back at redemption. That means if you over pay for the bond, you may be losing money in the end.
When people learn about how do bonds work, they are particularly interested in the interest rates or the coupon that bonds pay. Most bonds pay interests regularly such as monthly or quarterly or annually. Bonds that pay more interests are often desirable because people want regular income from their investments.
The interest rate of a bond is sometimes referred to as the coupon rate of a bond. The higher the coupon rate, the more attractive the bond is but high coupon rate does not always mean good investment. Investors that know how do bonds work will not only look at the coupon rate but more on the bond yield.
A bond with higher yield is more desirable than a bond with higher interest rate or coupon rate. For example, if you buy a bond at a premium price, paying much more than what you are going to get back, then even if the interest payments are high, they may not be high enough to offset the higher price that you paid.
Bond investing can be simple or complicated. There are complicated bonds and there are simple bonds. In learning how do bonds work, you will find out what types of bonds are easy to invest in and which are not. Finding out how do bonds work will also help you calculate the bond yield so that each time you want to invest in a bond, you can be sure that you will get the most money out of your investment.
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