Cents and Sensibility
Cents and Sensibility
Question: "What is a bond?" Bonds designed to
provide long-term
regular incomeAnswer: A bond is a loan an investor makes to a bond issuer.
When you invest in a bond, you loan the bond issuer a set amount of money, the principal, for a set amount of time.
The issuer promises to repay your principal at the end of that time, which is called the maturity date, and to pay you a certain interest rate at regular intervals, usually twice each year.
Typically, the longer the maturity, the higher the interest rate.
The largest issuer of bonds is the federal government. States and municipalities sell bonds to finance roads, schools, sewer improvements and other public projects.
Corporations sell bonds to expand operations, finance long-term debt or pay for other capital projects.
Most bonds are rated according to their quality.
This rating indicates the issuer's ability to keep its promise regarding timely interest payments and to return principal when due.
All bonds are not equally safe, so it's important to check a bond's rating before investing any money.
Once you invest in a bond, you can sell it to another investor before it matures. The price you receive will depend on what interest rates have done since you bought the bond
If interest rates have risen and investors can buy new bonds paying higher interest rates than your bond is paying, you'll receive less than you paid for your bond.
On the other hand, if interest rates have declined and bonds are paying less interest than your bond, other investors will be willing to pay more for your higher-paying bond.
However, none of this matters if bonds are used as they are intended.
Bonds are designed to provide long-term regular income to investors.
Fluctuations in a bond's market value should not be of concern to investors who plan to hold their bonds to maturity.
Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: gsteele2@pixi.com