Bonds? Complicated or simple? What are they?




Bonds? What are they? I’m sure you have heard this term thrown around or in the investment space a lot but what are they really? Lets have a super Quick Look covering off a few points on what bonds actually are - 


Bonds are debt securities issued by governments, municipalities, or corporations to raise capital. When an investor buys a bond, they are essentially lending money to the issuer in exchange for periodic interest payments and the return of the principal amount at maturity. Consider it like an I owe you in so many years but ill pay you like I would a bank for a loan of money.


Bonds are considered fixed-income investments because they typically pay a fixed interest rate over the life of the bond. This predictable income stream makes them attractive to investors seeking stable returns but remember, rates today will likely be very different to rates in 10 years, the bond is not variable, its fixed so make sure you are getting the right advice.


Bondholders receive regular interest payments, known as coupons or coupon payments, at predetermined intervals. The interest rate is specified at the time of issuance and is based on factors such as prevailing market rates and the issuer's creditworthiness. In simple terms, how big a risk is it, you giving your money to them? The bigger the risk, the bigger the returns should be.


Bonds have a maturity date, which is when the issuer repays the principal amount to bondholders. Maturities can range from a few months to several decades. Short-term bonds are often called "bills," medium-term are "notes," and long-term are "bonds." I will be happy to go further into some of these in more detail, in the future.


What is very topical now is interest rates as they have been. Rising in the past few years. Bonds actually have an Inverse Relationship with Interest Rates: The price of existing bonds in the market is influenced by changes in interest rates. When interest rates rise, the value of existing bonds out in the market tends to fall, and vice versa. This relationship is important for investors to consider when managing bond portfolios or understanding that a bond fund manager is actually managing these price risks actively within the fund by buying and selling different bonds.


Understanding these key points helps investors make informed decisions when incorporating bonds into their investment strategy.


I hope that has shed some light on what bonds actually are, you will find people you cross paths with will tend to want to sound like the smartest person in the room and make this all complicated, its not. Whilst it is extremely important to obtain the right advice in this space, the first step is to educate yourself, I hope this has helped with that first step. Subscribe to this blog as I continue to supply bite size learnings for you. 


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