by Kristy
Bonds are issued by corporations and
governments in order to raise the amount of money that they have. When you
purchase a bond, you’re giving the issuer a loan. The issuer is required to pay
you back the value of the loan you gave them on a certain date, and typically
in certain periods.
If you’ve ever purchased a government
savings bond, you’ve become a debtholder/lender/creditor to the federal
government. Same goes for big or small businesses; if you’ve ever bought a bond
from one, you now are the lender, and they now owe you money.
Bonds are extremely important, because
they provide a steady and secure source of income for the lender, and they also
support the issuer in what they need the money for. For example, you purchase a
bond for $1000.00, and has a 5% interest rate. Twice per year, you will receive
$25, for as long as you are the owner of the bond. At the end of your bonds
“life”, you will get the initial $1000.00 back as well.
When a bond is purchased, there is
still a risk of inflation. Inflation is the risk that the money you get back at
the end of your bonds life isn’t worth as much as when you originally bought
the bond. The higher interest rate, the more chance of inflation there is.
Bonds are more beneficial then not. They
provide a steady source of income (not enough to not have a job though), and
they help governments, businesses, etc. to stay in tack.
