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Bonds 101

What is a Bond?

Bond-Fixed Income-An agreement with legal force, in particular. Synonyms: promise, pledge, vow, oath, word (of honor); agreement, contract.  

Finance: An official Document in which a government or company promises to pay back an amount of money that is borrowed and to pay interest for the borrowed money.

Synopsis of Bonds

  • Bonds are like IOUs. Buying a bond means you are lending out your money. 
  • Bonds are also called fixed-income securities because the cash flow from them is fixed. Stocks are equity; bonds are debt.
  • The key reason to purchase bonds is to diversify your portfolio.
  • The issuers of bonds are governments and corporations. 
  • A bond is characterized by its face value, coupon rate, maturity and issuer.
  • Yield is the rate of return you get on a bond. 
  • When price goes up, yield goes down, and vice versa. 
  • When interest rates rise, the price of bonds in the market fall, and vice versa. 
  • Bills, notes, and bonds are all fixed-income securities classified by maturity. 
  • Government bonds are the safest bonds, followed by municipal bonds, and then corporate bonds.
  • Bonds are not risk free. It’s always possible-or the borrower to default on the debt payment. 
  • High-yield bonds are known as junk bonds.
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