|
So how do bonds work?
Bonds are loans.
Now take a deep breath, perhaps a sushi break, and let it sink in.
Bonds are loans. Most people are used to the idea of receiving a loan from a bank or credit card and then paying back the principal plus interest. When buying bonds, the roles are reversed. The investor takes on the role of bank, and the government or corporation is taking out the loan.
An Easy Example
- Joe Investor buys a 20 year bond of $1,000 at an interest rate of 10% on June 1st 2001.
- For the next 20 years, Joe Investor will receive annul payments of $100 ($1,000 * 10%).
- On June 1st 2021, Joe Investor will be repaid the original loan amount of $1,000.
Bonds are Debt, Stocks are Ownership
Bonds are loans. As such, buying a bond is vastly different from buying a stock.
Bond investors are creditors, and as such, have higher priority over the owners (stock holders) should the company go bankrupt.
On the other hand, owners (stock holders) are entitled to voting rights, dividends, and profits. Creditors (bond holders) are only entitled to the agreed upon loan repayment and interest.
|
