What is a bond, and how important is it to invest in them?
My grandmother gave me a bond for my birthday, and she told me that when I get a job I should buy bonds too. How important is it to do that and why should I buy them?
1 answer
Peter J.’s Answer
When governments or corporations or other entities need money, they issue bonds.
That entity then promises to repay you with a certain interest rate over a defined time period. The time period can be anywhere from a few days to 30 years or more. The shorter the time period, the lower the interest rate. Also, the more trustworthy a borrower is, the lower the interest rate.
Your grandmother is right -- bonds are generally good investments. Say you have $100,000 in bonds at a 5% interest rate. Every year, you will earn at least $5,000, or $416 a month, for doing nothing! That amount will grow if you keep re-investing the money and adding more. A hundred grand sounds so far away but if you think in the long term, say 15 years, and save every year, you can get there much faster than you ever thought possible, Once you understand compounding interest, you will be far more able to afford the nice things in life.
Stocks are also another investment to learn about. A good portfolio has a mix of both stocks and bonds. Bonds do not rise as fast as stocks nor fall as much. Bonds are not as exciting as stocks but they are generally less risky.