An explanation with an example would be greatly appreciated. Thank you 🙂
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Bonds are investment vehicles that typically don’t pay interest regularly but instead have a specific time or event when they “mature” and pay back the capital invested together with the interest accrued as a lump sum.
How you pay in and when you get the money can vary widely depending on who is offering them. Some may be for a fixed term, others may pay out when the holder reaches a specific age, like 18. Some may be cashed in early with some loss of interest, others may allow periodic additions to the sum invested. Some types, like those issued by governments, can be traded as assets themselves. Savings bonds are usually offered by banks and other places providing savings accounts as an alternative to interest-paying accounts and offer premium rates for locking your money up for longer terms.
ELI5
* It’s a loan.
* You loan the government some money.
* Later on, the government repays your money.
* When they repay you, they give you a little bit extra too.
The extra money is like a “thank you” for the inconvenience of you being without that money for however long the loan was.
a bond is basically you giving a loan to the government. you give them X amount of money to play with and over time they give you Y back. think banks giving car loans but now you are the bank.
So for instance a 50 dollar bond. You will give the government 25 dollars, they give you the bond saying basically hey buddy I owe you. They take a very long time to mature, can be up to 30 years. Once mature they are now worth the face value of 50 dollars. So, you have now doubled your money. You paid 25 and got 50 back yay. Also, some if you wait long enough can get a little bit more interest but not much, say 60 bucks if you wait another 5 to 10 years to cash it in. After that you get no more.
So, they are micro loans to the government. They are a relatively safe investment but an exceedingly slow one. They really are only good for young people. An old person won’t live long enough for the bonds to mature.
A bond is a loan. Bonds are forms of debt that can be issues by government or other large organizations. When you get a loan, you are given an interest rate, payment calendar, and payment amount. A bond is the exact same, except the entity soliciting the loan gets to make the rules. So, they choose to pay back the loan at the end of the life of loan, instead of on a monthly basis. This allows the entity some flexibility to try and invest the debt to recoup money. If the bond interest rate is 2% annual and the entity is confident they can make a 5% return annually on the capital, then issuing the bond makes sense.
In the case of saving bonds, the entity in question is the government. This is because the debt is considered risk less, the only way you won’t be paid your money is if the government literally failed. This is because the government can just print money to cover the cost of the bond. When you get a bond, you are told what the interest rate is, and that is fixed. So a 30 year bond with a face value (the payment amount at the end) looks like this:
x(1+interest)^30 = 1000 —> x=1000/(1+interest)^30
Given an interest rate, you can calculate how much you need to loan the government to get the bond. At the time of expiration, you are paid the full $1000. If you want to give the government more money, you can simply purchase several bonds with face value $1000.
You loan the government money for a period of time and they pay interest. Bonds are the primary way the government borrows money, issuing bonds that investors buy… these are often referred to as T-bills, T-notes, etc. and are what the government debt is comprised of. Most are bought by institutional investors like pension funds, mutual funds.
But there are also savings bonds, which are more consumer-oriented bonds. Instead of paying the interest twice a year you pay a price up front and then at the maturity date you get the face value. When I was a kid it was like the initial cost was half the face value, and it took 7 years to mature… so a $50 face value savings bond was bought for $25 and grew to $50 in 7 years. Not sure the specifics these days.
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