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Blue Chip Kids: What Every Child (and Parent) Should Know About Money, Investing, and the Stock Market by David W. Bianchi

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CHAPTER 7 BONDS AND CERTIFICATES OF DEPOSIT (SOUNDS BORING BUT IT'S NOT)

Fixed income usually refers to the bond market. The bond market is bigger than the stock market and bonds are traded just like stocks are traded. So what should you buy? Stocks or bonds? Maybe both.

Bonds

A bond is another very common security or financial instrument. Unlike a stock certificate that evidences your ownership interest in a company, a bond is very different. A bond shows that you have lent money to the company and the company has to pay you back by the bond maturity date.

Let's say T.R.E.N.T. Inc., is doing so well with the 36-foot boat it manufactures that it decides to produce a 40-foot model. You are confident that if you can manufacture the 40-footers they will sell. There is only one problem: The company does not have the money to make them. You don't have the money to hire the designer for the new boats, you don't have the money to make the molds for the new boats, and you don't have the money to hire the employees to build the new boats. Where can the company get the money?

One way for the company to get the money is to sell bonds. After some careful analysis you determine that you need $1 million to produce the new boat. T.R.E.N.T. Inc., then offers $1 million of bonds to anyone who wants to buy them.

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Each bond that the company sells has a face value of $1,000 and is redeemable ...

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