Cash Course: Investing & Bonds

hey friend what's wrong did you lose some money you lost some money in the stock market didn't you well buying stocks does have some risk maybe mix in some bonds let me fill you in on this episode of bonds are simply a loan from an investor someone like you or me given to an issuer typically a government or a corporation bonds are issued as a way to raise money for projects and expansions in exchange for money the issuer agrees to pay the investor the face value of the bond after a specific time period also called maturity plus interest payments that are owed usually twice a year so how are bonds different from stocks unlike stocks owning bonds doesn't make you a partial owner of the issuer on the other hand Bond issuers are legally bound to pay out their obligations regardless of how the company is doing if the company goes bankrupt Bond holders will generally receive some kind of compensation which isn't usually the case for investors of the company's stock overall bonds are generally less risky than stocks even though stocks have a higher potential rate of return so how do bonds work exactly let's look at a basic example Autos hot dogs wants to raise Capital that's money to expand its operations so it sells bonds at a face value or par value of $11,000 each with a maturity of 5 years the par value is the amount the bond is worth on its issue date the amount the buyer will receive when the bond matures and the amount used to calculate any interest that will acrew Autos hot dogs also agrees to make yearly interest payments or coupon payments at a 5% interest rate let's say you decide to buy a bond for $11,000 and you hold on to it for the 5 years it takes to mature each year you get your coupon payment of $50 because of the 5% coupon rate after the bond matures you've made $250 in profit from the coupon payments and you get your face value Val of $1,000 back too your yield or return on investment is 5% which in this example is the same as the coupon rate the coupon rate is a fixed interest rate that the bond promises to pay its Bond holders it's usually expressed as a percentage of the Bond's face value like the 5% on auto Hot Dog's Bonds on the other hand the yield takes into account both the annual coupon payment and the current price of a bond and represents the total return an investor can expect to earn the yield is often expressed as an annual percentage the key difference is that the coupon rate is fixed and remains constant throughout the life of the bond while the yield can change as the price of the bond changes why would a bond price change bond prices can fluctuate due to a number of factors including demand for the bond positive or negative news about the issuer that's the company borrowing the money the issuers credit rating the overall stock and bond markets and prevailing interest rates are all bonds the same just like there are all kinds of stocks there are all kinds of bonds there are government bonds like us treasuries corporate bonds zero coupon bonds and bonds of various grades and risks grades like school grades kind of all bonds get graded by rating agencies who use certain criteria to classify risk and an issuer's creditworthiness just like the ones you get in school bonds graded A's and B's are the best or in the bond World investment grade while bonds graded C's and below are junk investment grade bonds tend to be more likely to pay interest on time and pay the Bond's face values when they mature high yield bonds or junk Bonds on the other hand are rarely reliable in their returns and therefore very cheap and very risky now that you know a bit about bonds it's time to take action first just like any investing do some research there's a whole language when it comes to investing especially Bond investing make sure you understand what you're getting into second consider the risk bonds are generally less risky than stocks but there is still some risk to consider including the quality of the bond the time to maturity and the opportunity loss that comes with a generally lower return investment Third Watch and observe bond prices and yields impact the stock market the real estate market and other parts of the economy paying attention will make you a more Savvy investor there are many trendy Investments like Collectibles cryptocurrency and the latest hot stock bonds are an established type of investment and an important part of any [Music] economy watch more at prer kids.com and parents don't forget to subscribe