What are Bonds?

 

Howdy Wall Street Willy. I have a really big question for you.

Yes, what is it?

What is a Bond?

Well, a bond is basically a loan you make to a company – just like a bank makes a loan to you.

Whoa… That’s awesome! You mean, I can lend money to someone in a big, huge business, with just a penny?

Not exactly.

Well then, what do you mean? I can lend money to someone?

Yes, you can lend money to somebody by buying a bond.

How is a bond different from a stock?

In a stock, you are owning a part of the company. But in a bond, you have a loan that you make to the company – but you do not own any of the company.

But then, what’s the point of getting a bond?

The point of getting a bond is that a bond pays interest. The interest can be paid monthly, yearly, or once every three months (quarterly). And every time, they will pay you a certain amount of interest that’s a percentage of the principal (or the amount that you gave them as a loan).

That’s awesome. But how much interest does a bond pay?

Well, the coupon – or how much interest the bond pays – is dependent on what bond it is and how much the issuer (or the person issuing the bond) wants.

So you mean I can just make up an amount if I issue a bond?

Yes, but you would need to start a business so that you can issue a bond.

Is a coupon you get as interest in a bond like a store coupon?

No, a store coupon gives you a discount on something that you buy. But this coupon gives you plain old money!

Awesome – I like bonds! I have another question for you. How long would it take me to get my principal, or the money I gave them, back?

Well, that depends on the term of the bond, or how long it is for. You’ll get the principal, or the amount you gave for the loan or bond, back at the end of the term, which can be decided by the company.

But you can also sell you bond to another person on the bond market.

Well, there is so much selling and stuff… But how expensive is a bond anyway?

A bond is pretty much as expensive as the person who issues the bond decides. It could be $100, $1,000 or even $10,000!

Whoa… $10,000 is a lot of money!! Well that’s just plain great!

Yes… And, do you have another question?

Yes, I do. I to another question. Can I issue my very own bond, that costs a Billion Dollars, and it’s term, or how long it’s for, is a 100 years?

In fact, you can. If you own a business, you can issue a bond for that business.

Whoa… that’s awesome! But in real life, have there been any bonds that were a 100 years, or a lot of money?

Well, that is true. There have been such bonds.

In 1993, Disney had issued bonds with a term of 100 years, and they are due in 2093. And that’s when we’ll get the principal amount back.

So a real life business issued 100 year bonds?

Yes, they did!

So, it’s possible?

Yes, it is possible.

I have another big question for you. Where can I buy a bond? Can I buy it from a grocery store?

Not really. You cannot but it at a grocery store, because just like stocks, special people called brokers are the only ones who can buy bonds at bond exchanges.

And, you can also buy a bond through a bank.

Well, are there different kinds of bonds?

Yes, there are different kinds of bonds. But that’s a story for another time…

And one more thing- remember, finance is your friend!

Podcast: What are Bonds?

11 Key Personal Finance Concepts You Must Know for Financial Success

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