Bonds are essentially long-term loans. If a company issues bonds, it’s borrowing cash and promising to pay it back at a certain rate of interest.
There are many kinds of bonds. Ones sold by the U.S. government’s Treasury Department are called Treasurys.
State and local governments issue municipal bonds, while businesses issue corporate bonds (sometimes called corporate “paper”).
Since companies on shaky ground have a great chance of defaulting, they have to offer high-interest-rate “junk” bonds to attract buyers.
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Bond investors receive regular interest payments at what is called the “coupon rate.” For example, if you buy a $1,000 bond with a coupon rate of 5 percent, you’ll receive payments of $50 per year.
When the bond matures — after perhaps five, 10 or 30 years — you’ll get back your initial loan, called “par value.” Most corporate bonds have a par value of $1,000, while government bonds can run much higher.
Sometimes a company will “call” its bond, paying back the principal early. All bonds specify whether and how soon they can be called. Federal government bonds are never called.
Investors don’t necessarily buy a bond at issue and hold to maturity.
Bonds are often traded between investors, with their prices rising and falling in reaction to changing interest rates.
For example, when rates fall, people bid up bond prices.
If banks are offering 2 percent, a 5 percent bond starts looking good.