Chapter 52. Bonds
A BOND IS A LOAN. If you go to a bank to borrow money, the bank looks over your credit history and decides whether to offer you a loan. The banker also decides what interest rate you will pay. If your credit is immaculate, you may get a lower rate. If you are a bad risk, you probably won't get a loan at all, or you will end up borrowing money wherever you can get it, probably at a very high interest rate. When you take out the loan, you agree to pay a predetermined rate of interest and to repay the loan over a specified period of time.
When a large institution wants to borrow money, it may go to a bank the same way you do to make a loan. Or it may decide instead to borrow from investors by issuing a bond. Part of that decision is based on the level of interest rates. If they are low, the institution might want to lock in the low rate for a long term—just like you do when you take out a mortgage on your home—by issuing a bond.
Bonds are the debt of corporations and government agencies. When you invest in a bond, you are making a loan to the bond's issuer. The issuer promises to pay you a set rate of interest, which is sometimes called the coupon. The issuer also agrees to repay the principal at a specific time. (You probably repay your bank loan in installments. The issuer of a bond typically repays in a single lump sum at maturity.)
Your concern as a bond investor should be the same as those of the bank that loans you money. First is the ability or willingness of ...
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