Investing money can take many different avenues. You can invest your money into traditional investments such as stocks and bonds, or you can lend money to a specific person for start-up costs for a business. An investment occurs when you lend money to someone who will pay you back with interest, pay you back in the businesses income, or trade the ownership you have in that company.
Bonds are one of the most common types of a investments. Bonds are issued by corporations and governments. They are issued in order to get money for growing a business or running a government. A bond is a loan.
Corporations and the government frequently issue bonds usually in $1,000 denominations. Savings bonds are issued in other denominations such as $50, $100, etc. You are probably most familiar with savings bonds because you might have received them for birthdays and gifts for other occasions.
When you buy a bond, you have a few different ways to earn money. The first way is the most obvious way which would be by earning interest. If you buy $10,000 in bonds at a 4% interest rates, you will get $400 a year. Sometimes you may be paid annually, semiannually, or all at once when the bond is repaid.
You can also make money when paying a discount. If you pay a premium for a bond, meaning for a $1,000 bond you pay more such as $1,050, you are making less, but this happens more often with a bond that has a higher rate. A discount would mean you pay less such as paying $960 for a $1,000 bond.
You can also trade bonds. All bonds have different maturity times. Short term bonds usually mature in six months or less and long term bonds can mature in as much as 30 years. You can sell them or buy them within that time for a profit.
Here is a bond example. Let's say a corporation is selling $1,000 bonds and you want to buy 5. They are selling for $980 each at an interest rate of 5%, and they mature in 5 years. You buy 5 bonds and pay $4,900 with a $5,000 face value. Each year you make $250 and in year five you make $250 plus you are repaid $5,000. You make a total of $1,350 which includes $1,250 for five years of interest plus $100 from the discount rate you bought it at.
You could sell them before maturity and trade them, or you can just wait until they mature and collect the principle back. If you are young, don't invest too much money with bonds, focus more on stocks because you will make more money.
Bonds are one of the most common types of a investments. Bonds are issued by corporations and governments. They are issued in order to get money for growing a business or running a government. A bond is a loan.
Corporations and the government frequently issue bonds usually in $1,000 denominations. Savings bonds are issued in other denominations such as $50, $100, etc. You are probably most familiar with savings bonds because you might have received them for birthdays and gifts for other occasions.
When you buy a bond, you have a few different ways to earn money. The first way is the most obvious way which would be by earning interest. If you buy $10,000 in bonds at a 4% interest rates, you will get $400 a year. Sometimes you may be paid annually, semiannually, or all at once when the bond is repaid.
You can also make money when paying a discount. If you pay a premium for a bond, meaning for a $1,000 bond you pay more such as $1,050, you are making less, but this happens more often with a bond that has a higher rate. A discount would mean you pay less such as paying $960 for a $1,000 bond.
You can also trade bonds. All bonds have different maturity times. Short term bonds usually mature in six months or less and long term bonds can mature in as much as 30 years. You can sell them or buy them within that time for a profit.
Here is a bond example. Let's say a corporation is selling $1,000 bonds and you want to buy 5. They are selling for $980 each at an interest rate of 5%, and they mature in 5 years. You buy 5 bonds and pay $4,900 with a $5,000 face value. Each year you make $250 and in year five you make $250 plus you are repaid $5,000. You make a total of $1,350 which includes $1,250 for five years of interest plus $100 from the discount rate you bought it at.
You could sell them before maturity and trade them, or you can just wait until they mature and collect the principle back. If you are young, don't invest too much money with bonds, focus more on stocks because you will make more money.
About the Author:
How do bonds work? Bonds aren't as complicated as you think. Don't let them confuse you. Learn more about stocks, bonds, and if you want to invest in real estate.
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