While most people do not look at bonds as anything other than a less risky alternative to the stock market, that is not necessarily the case. Bonds are also useful in your investment portfolio with stocks instead of as a strict alternative – if you want to have the best investment plans for you, you’ll use some of both. In order to understand the part that bonds will play in your investments, you should understand what a bond is.
When you buy a bond, you are not really buying anything. Essentially, by purchasing a bond, you are getting a big I.O.U. from the company or government that you bought the bond from. In other words, a loan. A bond will make you the creditor in a loan to whoever you bought the bond from.
However, this loan is for a fixed amount of time, over which you’ll be paid the right interest rates. When it is time for you to cash in the bond, it will mature. On the maturity date of your bond, you will be paid a lump sum for the amount that the bond was initially. If you’re looking for a very safe investment, bonds are it. Granted, you will not be able to make more money than the interest rate in the original bond – however, you are guaranteed to make at least that amount of money.
There are two different ways that bonds might deal with the interest payments. You should find out which is going to be the case for your bond ahead of time so that there are no surprises later on. Some bonds use coupons – which means that you’ll be paid the interest money while you hold the bond, before it matures. At the maturity date, you’ll only get your original bond payment money back. The other option is that the interest is simply added on to the initial bond amount. You’ll then get all of the money, including interest, at the maturity date of the bond.
If you do not want to hold onto your bond until the maturity date, some bonds are transferable. You will not get the same amount back, and you may lose money. However, if you need to sell your bond early, you may be able to find buyers. It is always recommended to wait until the maturity date of your bond, however.