Bonds

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Bonds are a fundamental and important part of the financial world. Companies, governments, cities, and nations all sell (or issue, as it's called) bonds to raise money. The seller of the bond has to pay back the money received at some time in the future, which could be several years; the time when repayment is due is known as the maturity date (bonds). In addition to eventually repaying the money, the seller agrees to make interest payments to the buyer ( bondholder) at regular intervals until the maturity date. The amount of interest paid on bonds is also called the coupon rate. So the company or town or whoever issues the bond immediately gets money from the sale of the bonds to spend however it wants (sometimes bonds are issued for a specific purpose), and the bondholder gets regular interest payments plus its money back at maturity. What is the downside to buying bonds? Mostly it is the risk of defaulting by the issuer. That happens when the issuer can't make the coupon payments to the bondholders, and so may have to declare bankruptcy. This means the bondholders have to wait with all the other creditors to see if they can recover any of the money they originally paid for the bonds. Unfortunately, the chances of a full recovery are usually small. Bondholders' best hope is to get a part of their money back. Like most things in the financial world, the greater the potential reward, the greater the risk. Bonds issued by financially secure companies are called investment-grade bonds, and because these companies are so prestigious they don't have to offer high coupon rates to attract buyers for their bonds. On the other hand, if a financially weak company issues bonds, the only way it can get people to buy them is to offer a very attractive coupon rate. These are called noninvestment-grade or, more popularly, junk bonds. Bonds issued by municipalities ( municipal bonds) and the federal government ( government securities) are normally relatively safe investments; if these entities run short of money, they can usually raise funds through taxes. Who buys bonds? Anyone can, but they tend to be sold in large amounts, known as denominations, so bonds are most often bought by institutional investors who have a lot of money to invest and want to have some investments other than stocks to balance their portfolio. Bonds are also heavily traded in the secondary market, so many bondholders are actually not the original purchasers of the bonds. It's not that easy for a private individual to find out the prices of single bonds; they are not really listed anywhere in the same way that the prices of stocks are listed, although this is changing as bond information Web sites - especially for municipal bonds - are being created. A relatively easy way to invest in bonds is by investing in bond mutual funds or bond exchange traded funds. An important feature of bonds, and something that the investor should look out for, is that they can sometimes be "called." This is known as a callable bond. (Note that a bond bought as an investment is different from a surety bond.) See also Laddering and Savings Bonds.