Most people are much more familiar with the spy named Bond than its investment counterpart. This article will hopefully enlighten you as to what bonds are, as well as the types available and what affects them.
Firstly: What is a bond?
Interestingly, Bonds come under the same category as a Mortgage: they’re both Debt Investments. But broadly, it’s a receipt of payment to an institution or government of a loan. The amount loaned to the company/government has a time frame called ‘maturity’ for when you’re paid back.
Bonds have two distinct types. These consist of Corporate: payable to a company, and Government, which have their unique features.
Self-explanatory, they are a type of debt investment paid to the government and have different ranges in maturity. Depending on the kind of bond an investor pays into, the time frames change. They can vary in maturity length from 2 to 30+ years which makes them an attractive long-term investment. Changes in the country’s inflation rate are the main factor that can impact these bonds.
Much like their governmental counterparts, they allow the investor to buy into a company as an alternative to equity financing. These, however, offer higher rates of interest over their maturity period. The difference is in the credit risk; though unlikely, there is always a possibility that the company would face bankruptcy, jeopardising your investment.
This risk is the only significant difference, only Corporate allows for more flexibility in selling before the maturity date.