How Do Bonds Work

Before you invest in any types of bonds, it is important to know how do bonds work. Bonds can be complicated to understand at first since there are many types of bonds and therefore many rules. It is also more important to understand how bonds work when you invest in bonds because people usually invest in bonds for the interest payments as well as redemption value which are something in the future. While when a stock goes down in value you know you are losing money, when a bond goes down in value, you may not be losing money but if you understand perfectly how your bonds work.

How do Bonds Work explained

Bonds are issued or sold by corporations (corporate bonds), state and local governments, the US government, foreign governments, and Federal agencies. Bonds are complicated because different bonds work differently. Corporate bonds, for example, work differently from US government bonds and other types of bonds. Bonds, similar to insurance policies, can come with rules attached and it is up to the bond investor to know all the rules and fine prints. See different types of bonds for explanations of each type of bonds available on the marketplace.

What all bonds have in common

All bonds have the followings in common. Bonds are formal IOUs which means the bond issuer (entity that issues the bond) formally promises whoever buys the bond to repay the total amount borrowed on a future pre-set date. Bond issuers issue bonds to raise money. Corporations issues bonds in order to raise working capital, see corporate bond offerings.

Just like interests in savings accounts, the bond issuer usually also promises to pay interests during the life of the bond. How often the bond pays interests depends on that particular bond and it could be monthly, semi annually, annually or not at all. The percentage of the bond interest payments is set initially and usually does not change during the life of the bond.