So Many Shoes, So Little Money – Blog

Bonds

January 26th, 2009

You thought you knew all about bonds – friendships, relationships, marriage, the hot one who actually did call the next day. So all this economic talk about rates and payments has you flummoxed.

In financial terms a bond is a loan to a company or to a government. When you buy a bond, you agree to loan your money to the company or government in exchange for interest payments they make to you and the return of your money at a later set date. You receive your interest rate payments in the form of checks, sent out within a set time frame. You receive the full amount of your original loan back when the loan matures. The interest rate you receive depends on how strong the company is. The stronger the company, the less risky the loan and therefore the less interest you receive. (Conversely, the weaker the company, the riskier the loan and the more interest you receive.)

Just as you have a credit score, so do companies and governments. Like you, the better their score, the lower interest rate they have to pay. Where are bonds traded? Just as there is a stock market, so is there a bond market. (See January 12 Stocks posting). However, unlike stocks, some bonds don’t have to be traded in the market. When bonds are not sold on the bond market the transaction is called Over the Counter (OTC).

Turns out, financial bonds are so much easier to comprehend than the real ones.

Filed under: Debt

Tags: Bonds, Investing, Personal finance