Explain like I’m 5. What are bonds, how do they work, should I invest in them over etfs or alongside etfs, and are they worth investing in. Thanks in advance.
In: Other
The government wants to borrow some money from you while making it worth your while in the long run.
You buy a bond, which is kind of like a check — it has value because we say it has value.
You buy a bond for $25, and the government gets to use your $25, and then in five or ten years or whatever the term is, the government gives you $50.
Bonds are low risk and guaranteed, and they take time.
They may perform better than the market over the same amount of time, or they may perform worse than the market over time.
Bond is an IOU you buy, whoever owns it gets paid a periodic coupon and when the time runs out the entire sum is paid back along with the last coupon payment. Lets say there is a yearly coupon payment of 10% of the nominal value of the bond which is 1000usd and the period is 10 years. So if you buy that bond you get 10 yearly payments, 100usd each and after 10 years the 1000usd value of the bond is paid back too, total you pay 1000 to buy the bond and get back 2000 over 10 years. Unless of course the bond emitter goes belly up and says they have no money and they aren’t going to pay anyone anything. That can happen.
A bond is buying something that is worth a fixed amount in the future for less money now.
So maybe you get a bond that is worth $5 in 5 years, but cost $3 today.
The person selling the bond gets money now, you get more money in the future.
The good: Bonds are very low risk when issued by people you expect to be around and honoring their debts in the future. If you think the United States Government won’t default on their debt, for example, a US savings bond is a very safe thing to buy, as you can feel sure it will be honored at the end of the period.
The bad: Bonds are so safe that they tend to have quite a low interest rate and poor return on investment.
Latest Answers