Investing: Understanding Bonds

Bonds are great investment instruments and compared to stock trading, bonds are often seen as being relatively less risky.

12:17 19 June 2013

Bonds are some of the most common instruments used by businesses to raise money. Basically, a bond is an agreement made between a company/government and the investors. The company will benefit from this, as it will be able to raise money to expand the business; on the other hand, the investor will benefit because he will be paid interest on top of his capital once the bond matures.

Different bonds have different interest rates and these are determined based on few factors. The main thing to consider here is the stability of the company. If the company is very stable and is unlikely to default on its debts, it will offer investors a lower interest rate because there is less risk involved.

For new investors, it is highly recommended to stick with stable companies. Although you’ll get lower interest rates, you can be assured that you’ll get your capital or initial investment once the bond matures.

Why invest in bonds?

Bonds are great way to preserve your capital while getting higher interest rates compared to regular savings account. They’re also great for new investors as they are generally less risky when compared to the stock market. The key here is making sure that you only buy bonds from reputable and stable companies.