The Basics of Bonds

bond basics

Excellent explanation of ‘bonds’ using simple language. Great FAQ style post from the Small Investor

The Small Investor

Ask SmallIvy

Understanding bonds and things like why they behave the way they do if interest rates rise or fall is really not that hard if you know some of the basic facts.  Today we’ll go into what bonds are and why they behave the way they do.

What is a bond?  A bond is a loan that is made to an entity, typically a government or a corporation.  Unlike a consumer loan such as a mortgage, however, the government or company doesn’t pay down the loan as they go.  Instead, they pay interest only throughout the life of the loan, and then pay back the loan in full on a future date.

What is a coupon?  The coupon is the percentage interest the bond will pay throughout its life if you bought it from the entity directly.  For example, if a bond has a coupon of 6.75, it would pay 6…

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