What is a bond?
What is a bond? (1:00)
A bond is a promise by a company or government to pay interest on the money they have borrowed and ultimately pay you back on your investment. Bonds are most commonly issued by governments and well established corporations.
Over time bonds can rise and fall in value depending primarily on the market’s assessment of the risk of not getting paid back and the rate of interest available on other bonds. However, even though bonds can move in price, for high quality bonds (such as those issued by stable companies and governments) the movements up and down are generally less than that of shares.
Bonds generally have returns capped by the interest rate and repayment of the bond. This means that the best that can happen is you get paid in full with all interest on time. However, if a bond doesn’t pay you back (defaults) then you can lose all or most of your money. This is fairly uncommon with debt of quality companies and especially governments, but it means that bond investing is more about risk management because your potential to lose money is far greater than your gains from interest. This means that bond investing is generally a cautious pursuit of investment in well-respected companies and governments. When investments are managed in that way, investing in bonds is typically lower risk than investments in shares.