Grade 8 Lesson 2: Types of #investments - #bonds

Bonds are one of the most important investment instruments, much like equities. At the most basic level, bonds are loans that the “buyer” makes to a company or a government organization. The company or the government organization in turn gives the buyer interest for the money the buyer has loaned to them by buying the bond.

Let's suppose you want to buy a house, but you don’t have enough money. You take a loan from the bank, which you then utilize to fulfill the home-buying goal you have. A bond is similar – organizations borrow money from you to fulfill a goal they have. Like you pay interest to the bank on your loan, the bond-issuing organization pays you interest.

The interest can be paid monthly, yearly, quarterly, or all together at maturity. Note that the interest is typically a percentage of the original amount invested and, in most cases, is something you will know before you invest.

Bonds can be bought through brokers, much like stocks. They can also be bought directly from the organization issuing the bonds or from a bank. Most bonds have a fixed maturity date i.e. the date when your principal will be paid back to you along with any outstanding interest.

There are several types of bonds – some of the most common ones are:
• Traditional Bonds: A bond in which the entire principal can be withdrawn at a single time after the bond’s maturity date is over is called a Traditional Bond.
• Fixed-Rate Bonds: When the coupon rate remains the same through the course of the investment, it is called Fixed-rate bonds.
• Floating Rate Bonds: When the coupon rate keeps fluctuating during an investment, it is called a floating rate bond.
• Zero-Coupon Bond: When the coupon rate is zero and the issuer is only applicable to repay the principal amount to the investor, such types of bonds are called zero-coupon bonds.
• Inflation-Linked Bonds: Bonds linked to inflation are called inflation-linked bonds. The interest rate of Inflation linked bonds is generally lower than fixed-rate bonds

There are a lot more details one can study if bonds’ is a topic of interest. Our goal here is to introduce you to the concept of bonds.

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