Understanding Terms In Finance: Bonds

For people who don't consider themselves financially savvy, sometimes financial terms can seem confusing and too difficult to understand. Although we consistently hear terms like stocks, bonds, interest, equity, and other words, sometimes we don't understand the meanings or what these words represent. It's easy to become overwhelmed by all there is to know about finances, but with a little research, it is easy to get a basic understanding of what these terms mean. Understanding finances will help us better manage our own.

One term we might hear often is a "bond." Thought we may be familiar with the term, perhaps we are unfamiliar with its meaning. A bond is considered a debt security or a type of loan. But unlike a loan from a bank or financial institution, you are the one lending the money. There are several reasons this might happen. Companies and institutions need money to function, so sometimes in order to get the needed funds for operation it is necessary to borrow money from individual investors like you. This is accomplished by issuing bonds with interest rates. You, the investor, purchase a bond with the understanding that the company will pay back the original principle of the bond as well as interest that is due. However, unlike some other types of loans, bonds have a set date at which they must be paid back in full, which is known as the maturity date. During the duration of the bond, the company pays back the investor at set intervals.

There are a few different parts to a bond that someone interested in purchasing bonds should be familiar with. First is the amount for which the issuer, or the company issuing the bond, must pay interest. This is called the principal, nominal, or face amount. The net proceeds that the issuer receives from the sale of the bond are called the issue price or in other words, the price at which you, the investor, buy the bond when it is first listed. The maturity date, as mentioned before, is the date when the issuer must repay the principal amount. This may be a period from one year up to even one hundred years. A common maturity term is thirty years. Another part to a bond is the coupon or the interest rate the issuer pays to the investor. This is usually a fixed rate.

Though there are different types of bonds with different terms, the parts listed above are the basic aspects to a bond. A person interested in purchasing a bond should make sure to make sure they are familiar with all the terms so that they are confident they are making as wise an investment as possible.