The financial comforter is here, to share this week’s topic.
Over the past few weeks, we’ve had the opportunity to discuss the differences between stocks and bonds, while breaking down stocks a little more last week.
Let’s get into this week’s topic: Bonds
Bonds – What makes them appealing to an investor
The purpose of issuing bonds, also known as debt securities, is to raise capital (money) for some type of enhancements or growth for the company. It’s a company’s “promise” to pay back an investor for the temporary loan, in return for periodic interest payments. When we, as the investors (aka bondholders or purchasers), buy a bond from a corporation, we are really loaning them money for a specified period of time. The company, in turn gives us a “note” or a bond, showing the investor what it will be worth once the bond matures, along with other pertinent information identifying who the bondholder is. Bonds can be short-term or long-term, depending on which one the company is offering. Each bond usually has a fixed amount of interest paid AND a certain amount of years it must stay in effect to reach the full face value (face value can vary). Investors like the fact that they can earn additional income for the life of the bond (certain restrictions apply with certain bonds and maturity dates). The bonds that most people are familiar with are Savings Bonds, series EE. With these, you buy them at face value, and have to hold them for at least a year before you can redeem them. While you will continue to earn interest on them up to 30 years, people usually cash savings bonds out earlier than this. Grandparents and parents purchase savings bonds for children so they can have some extra money when they are of age. Believe it or not, government bonds are the safest bonds, but bonds in general are known to be a safer vehicle to invest in. You will also remember in last week’s blog, we spoke about what happens if a company goes under or can’t pay back the investor….There is a hierarchy of how people will be reimbursed if a company has to liquidate assets. Common stocks are at the bottom of the totem pole, so anyone who holds common stocks will most likely not get their money back. With bondholders, since they are looked at as debt collectors, there is a stronger possibility they will receive their investment back, due to their number on the hierarchy list.
Bonds – What makes them less desirable to an investor
What makes bonds less desirable to an investor is the fact that bonds are not very inflation friendly because the rates are fixed. In the event inflation strikes, the money will not have the same buying power when the bond matures as it did when it was purchased.
It is important to do the research on all companies before purchasing bonds. Stable companies have a better chance of fulfilling your investment promise as opposed to unstable companies. When you purchase bonds from an unstable company (known as purchasing “junk” bonds), your investments are riskier. This could hinder you from receiving your periodic payments OR your investment back.
Keep in mind, there are a lot of different types of bonds. The ones I’ve highlighted are corporate and savings bonds (pictured below).
Sample of McDonald’s Corporate Bond
Sample of Savings Bonds Series EE
Note: Investments are NOT guaranteed
So another week down of speaking investment lingo. We are becoming experts, one topic at a time.
Next week’s topic: A question session about what we’ve discussed thus far. The first person to answer the questions correctly will win a $15 breakfast credit deposited into your cash app account.
As always, if you have any questions, please reach out to me here or email me at: firstname.lastname@example.org
Have a beautiful and blessed week!
Changing the lives in our community….one family at a time