What is Bond?

Corporation used bond to raise money and they promise to pay you back you at the end of the maturity with a set of interest rate over that time period.

Bond are used to raise money for corporations, municipalities, and governments. It's and IOU: You loan them the money and they promise to pay you back at the end of a specified time period (the maturity). They also promise to pay you a set of interest rate over that time period. For example, if you buy a five-year $1,000 bond with a coupon rate (interest rate) of 6 percent, you expect to be paid $60 a year or $30 semiannually over five year and then your $1,000 is return.

Bonds are usually considered safer than stocks because, if a company goes bankrupt, it will pay back its bondholders before it ever gets to its shareholders. All state and federal bonds are usually backed by the taxing power of the government.

 

Bond prices do fluctuate. A bond selling at a discount is selling below its maturity value, and a bond selling at a premium has a price above the maturity value. Why? Because interest rates go up and down.

If you have to sell the bond after three years because you need the cash, you may get more or less than your $1,000 depending on the prevailing interest rate in the bond market. If interest rate are higher than 6 percent, you will get less. This is because whoever buys your "old" bond could buy a new bond with an 8 percent interest rate and received $80 in annual interest instead of the $60 your bon is currently paying. Your bond will sell for less so that the new owner will received the equivalent of the 8 percent rate. If you hold on to your bond no matter what happens to interest rate over that five-year time period, you will get back your $1,000. Bonds are rated by some of the firms that rate insurance companies. Bonds with the highest quality and lowest risks are rated AAA.