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Basics of Bonds
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As a bondholder you are a lender to a company or government.

Bondholders are generally interested in safety--more interested in return OF principal than return ON principal.

Along the way, for the privilege of using the money, the borrower pays the lender a coupon payment based on a rate of interest.

Although not as volatile as stocks and the stock market, bonds are not without risk. What are the risks of owning bonds?

  • In the case of an individual bond, the issuer stops paying and defaults
  • In the case of a bond mutual fund or index, the risk is that some or all of the issuers default.
NOTE:  Both bonds and bond mutual funds may be subject to additional risks such as interest-rate risk, reinvestment rate risk, prepayment risk, political risk, etc. resulting in short-term changes in value. Assuming the borrower does not default, the investor will receive the money lent when the bond matures and collect coupon payments along the way.

Bonds tend to be less volatile than stocks because they are "senior in the capital structure". This means that in the event of bankruptcy bondholders get paid before stock owners. Practically speaking, bondholders generally get something whereas stockholders usually get nothing.  Since bonds are generally less volatile than stocks, investors consider them to be less risky.

 

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