Bonds
What are bonds?
Bonds are basically IOUs. They are usually sold (or 'issued') to investors as a medium- or long-term investment by companies or governments looking to raise funds for a specific project such as infrastructure or expansion.
Bonds are a medium or long-term investment. They pay out interest and can be traded in the markets as either an individual investment or as part of a pooled investment.
Bonds are also known as fixed interest securities.
Where have you heard about bonds?
Bonds are often talked about in the news as an alternative for investors worried about the stock market or seeking more reliable income.
Different types of bonds are also seen as an important indicator of how a country's economy is performing.
The credit rating of the company or government that issues the bond will affect its price in the bond market. This rating is done by companies such as Moody's and Standard & Poor's.
What you need to know about bonds...
Newly issued bonds usually sell at face value – also known as par value or principal. But they can change hands in the market later for much more or less than this.
Bonds in the US are usually given a face value of $1,000 (£100 in the UK), though this figure can later go much higher, especially for government bonds. This figure is what will be paid to the holder at maturity – when the loan value is paid back.
Investors often choose to include bonds in their portfolios as lower risk investments, to supply investment income and as a way of diversifying their assets to spread risk.
Bonds are classed as debt whereas stocks are equity. This means holding bonds in a company won't give you any voting rights in how it is run.