What are Bonds

During these times of financial difficulties, people look for alternative and safer ways to secure their cash while earning fixed passive income from such investments.

Similarly, one of the safest and most common way to freeze and restore the value of an asset is through investment in bond securities.

Bonds are certificates of indebtedness, usually issued by a company or a national government as part of their financing scheme. In essence, a bond is simply a promise made by the issuer to pay the holder a sum certain plus interest on a specified future date or at fixed intervals.

A bond normally matures 10-20 years from the date of issuance. Investors nowadays see bonds as a sound investment because of its stable nature, unlike stock certificates which surge up and down depending on the current trends in the stock market. Bonds although affected by the bond market, tend to be volatile and less risky.

Some bonds also have fixed interest rates which erases further interest rate risk. As compared to stocks, bonds are considered to be a more liquid investment. Professional investors cite that it’s easier to sell bonds than stocks, owing it to the fact that bonds are almost a risk-free investment.

In some countries, bondholders also enjoy a limited yet reasonable degree of legal protection. In case of bankruptcy the government bails out the company by offering bondholders a certain recovery amount.

Some bonds also have special features that reduce risk. One of them is the sinking fund bond, these kind of bonds call for the maintenance of a sinking fund which comes from the annual income of the issuing company.

The sinking fund is maintained until maturity date and is used to settle the obligation.

Another example of bond that has an added security feature is the coupon bond. Coupon bonds are bonds which has detachable interest coupons. These coupons can be used to claim accrued interest income on a yearly basis. Basically, a coupon bond pays interest ahead of maturity.

Some bonds also have added income features. There are bonds that have income-sharing prerogatives.

In addition, there are also bonds backed by mortgages, real properties and other collateral. In case of bankruptcy, bondholders holding such collateral bonds can still go after the company’s fixed assets.