A bond is a form of debt instrument that can be likened to a loan. When individuals or entities invest in bonds, they essentially lend money to the issuer. In return, investors receive periodic interest payments, and the principal amount is repaid according to the terms outlined in the bond agreement.
When you purchase a bond, you are essentially providing evidence of lending money. The bond document specifies the interest rate for the loan and the maturity date, indicating when the loan will be repaid. Larger companies, states, and other institutions often utilise bonds as an efficient means to borrow money from a multitude of creditors simultaneously.
Investors commonly engage with bonds through bond funds, where they pool their resources to invest collectively. Alternatively, companies can choose to invest in bond funds or buy individual bonds. Seeking advice from your bank on investment-related queries is advisable in either case.
Government bonds and corporate bonds
Bonds come in various types, but two of the most prevalent categories are government bonds and corporate bonds.
Government bonds are generally regarded as the safest type of bonds because they are issued by a government entity. While the expected return may not be the highest, it is considered secure due to the stability associated with government-backed securities.
Corporate bonds, on the other hand, are issued by companies, including those in real estate or banking. The company itself guarantees these bonds, and the security of the bond is contingent on the financial health of the issuing company.
What is a bond fund?
Individual investors often opt to purchase bonds through bond funds, which are fixed-income funds specialising in long-term bonds. Investing in a bond fund can yield higher returns compared to traditional savings accounts. Bond funds offer flexibility with various maturities, allowing investors to choose the level of risk and potential return that aligns with their financial goals.