A bond is like a loan that you give to a company or government. They promise to pay you back the money you loaned them (called the principal) plus some extra money (called interest) over a certain amount of time. This time can be a few years or even decades. Just like how you get paid for doing chores or getting good grades, the company or government gets paid for borrowing money.
A typical example of a bond is as follows in 2013 Apple, offered $17 billion in bonds to investors, which was the largest corporate bond offering in history at the time. Launched on April 30, the issue was Apple’s first since 1996. The bond offering included maturities ranging from 3 years to 30 years and had an overall interest rate of 3.85%. The proceeds from the bond offering were used by Apple for general corporate purposes, including share repurchases and dividend payments. This bond issuance helped Apple to raise capital and diversify its funding sources, while also giving investors an opportunity to earn a return on their investment in the form of interest payments.
Are bonds different from stocks?
Bonds are different from stocks. When you buy a stock, you own a small piece of the company. But when you buy a bond, you’re lending money to the company. This means that if the company goes bankrupt and can’t pay its bills, bondholders (people who own bonds) get their money back before stockholders (people who own stocks) do.
What are the different types of bonds?
Bonds come in many varieties, including municipal bonds, which are issued by municipalities, corporate bonds, which are issued by businesses, and government bonds, which are issued by nations. Similar to stocks, some bonds can be exchanged on a market, allowing you to sell them to third parties if you so want. Other bonds, however, are not tradable, so you must keep them until they are repaid. Examples of municipal bonds can be found around the world, for example, In the UK, local governments also issue bonds to raise capital for infrastructure projects and other expenses. These are known as “municipal bonds” or “local authority bonds.” An example of a UK municipal bond is the London Borough of Hackney issuing a bond to raise funds for housing developments. Or in the City of San Francisco, General Obligation Bonds were issued in 2020. The bond was used to finance various capital improvement projects in the city, such as infrastructure upgrades and public facility renovations. The bond had a maturity of 20 years and a coupon rate of 2.5%. Investors who purchased the bond were lending money to the City of San Francisco, and in return
How are bonds issued?
Bonds are often issued through a procedure known as underwriting. This indicates that a number of financial institutions or businesses acquire the entire bond issue from the issuer and then sell it to individual investors like you and me. The bank or business assumes the risk that they may be unable to.
Bonds also have something called a maturity date. This is the date when the issuer (the company or government who borrowed the money) has to pay back the bondholders. After the maturity date, the issuer doesn’t have to pay any more money to the bondholders. The length of time until the maturity date is called the term or tenor of the bond.
In summary, a bond is a loan that you give to a company or government. They promise to pay you back the money you loaned them plus some extra money over a certain amount of time. Bonds are different from stocks and there are different types of bonds like municipal, corporate, and government bonds. And bonds have a maturity date which is the date when the issuer has to pay back the bondholders.
If you’re looking to become a savvy investor, our previous post on what is the FTSE 100 is a must-read. Gain valuable insights and tips by following the link to access it.