Bonds

• Bonds are issued by governments when they want to raise money.
• By buying a bond, you're giving the issuer a loan, and they agree to pay you back the face (nominal) value of the loan on a specific date (i.e. When the bond matures).
• Issuers also pay you periodic interest payments (coupons) along the way.
• The bond yield represents the overall return you earn from a bond, including both the interest payments and any changes in the bond's price.
• Two potential benefits of bonds:

  • Gives a stream of income
  • Offsets some of the volatility you might see from owning stocks
• When you buy a bond, you're buying someone's debt.
• People buy shares because they see a potential for it to increase in value (as the company grows); bonds don't do that.
• A bond is a debt and you are buying it for a certain amount of time. This is paid back at a certain date, with interest along the way.
• Government bonds are frequently traded on bond markets, therefore their market price may be quite different to the original price set by the government.
• Why are bonds bought?

  • They provide a predictable stream of income
  • If the bonds are held to maturity, the bond holders get back the entire principle (face value), so bonds are a way to preserve capital while investing
  • Offsets volatility in stock holdings
  • They may be issued by firms because they do not want to sell any more shares
  • They are bought and sold to raise capital
• Where are bonds bought and sold?

  Financial markets
• Bonds tend to underperform in the long-term
• When you buy a bond, you earn through interest
• When you buy a share, you earn through dividends
• Stocks and shares have a better performance level in the long-term
• Government bonds are fixed interest securities; this means that a bond pays a fixed amount interest - this is known as a coupon.
• What is a coupon?


  The guaranteed fix annual interest payments often divided into two six-month payments paid by the issuer of a bond to the owner of the bond.
• What is the yield?


  The interest rate that is given in return for the bond
• Calculating the bond yield (coupon):


  Annual coupon payment / current market price × 100
• There is an inverse relationship between a bond and its yield