bonds: what are they and how do they work?

BONDS: WHAT THEY ARE AND HOW DO THEY WORK

A bond is an income producing investment in the form of a loan made by you the investor to a borrower.

A bond can also be thought of as an I.O.U between you and the and borrower that includes the details of the loan and the structure of payments the borrower will make to you. 

Bond prices do a reverse matching with interest rates, this means when interest rates go up, bond prices go down and vice-versa.

Bonds have maturity dates this means at a certain time the principal amount borrowed must be paid back in full or the borrower falls in default.

These loans are frequently made to governments or a large corporations.

Governments run similar to businesses and need to raise money to pay for public roads, hospitals, schools etc. A good example is the current pandemic, some governments may have needed to raise money to help fund such things as the free testing, hospitalisation and vaccines. They also would have needed to raise funding for the financial support they have been offering to individuals and businesses affected.

Large corporations also borrow money in order to grow and scale their companies. One of the reasons they utilize bonds is that they may need to borrow a far larger amount of money than the average bank can provide them with.

Most corporate and government bonds are publicly traded; others are traded only over-the-counter or privately between the borrower and lender.