Have you heard about bonds and wanted to invest in them but have no idea where to start or what they are? Or maybe, you just started investing and are looking to learn more about bonds and how they work. Either way, you're in the right place.
Statistics show that many individuals find the terminology used in the bond market difficult to comprehend. This lack of understanding can make it challenging for investors to make informed decisions when it comes to investing in bonds.
In this post, we'll provide a quick guide to understanding bonds and some key aspects people are often confused about. We'll cover topics from the basics of bonds to some confusing terms used to explain them.
What Are Bonds?
Simply put, bonds are a type of debt security issued by companies, governments, or other organizations. When you buy a bond, you're essentially lending money to the issuer for a set period, and in return, you receive interest payments at a fixed rate.
"Simplifying key terms and concepts can help demystify bonds for women and anyone who finds the bond market confusing" - Jessica Perrone, Founder Her Financial IQ
Key Bond Terms to Understand
Studies have shown that a large percentage of individuals (not just women), particularly those new to investing or with limited financial knowledge, find the language surrounding bonds to be complex and confusing. According to a Financial Industry Regulatory Authority (FINRA) survey, only 28% of Americans could correctly answer three basic questions about bonds, highlighting a significant knowledge gap in this area.
To help you better understand bonds, I'd like to clarify some key terms that are often misunderstood. By breaking down these terms, I hope you will gain a deeper understanding of the mechanics of bonds and be better equipped to explore the bond market further.
Issuer refers to the entity that sells a debt security, such as a bond, to investors. This can be a company, government, or other organization that needs to raise funds. The issuer's creditworthiness is an important consideration for investors, as it determines the likelihood of the issuer being able to make interest payments and repay the bond at maturity.
Maturity refers to the date a bond's principal is due to be repaid. This is the date the issuer will repay the bond's face value to the investor.
Term refers to the length of time until a bond's maturity date. For example, a 10-year bond has a term of 10 years.
Coupon refers to the interest rate that the bond will pay each year. The term "coupon" comes from the time when bonds were printed with actual coupons that investors would clip and redeem for interest payments. Today, the term "coupon" is still used to refer to the interest rate on a bond.
Call Date refers to the date the issuer can redeem the bond before its maturity date. For example, if interest rates have fallen, the issuer may choose to, in essence, cancel the bond on this date and issue new bonds at a lower interest rate, which could leave investors with a lower return than they had anticipated.
Bonds for Beginners
If you're interested in learning more about bonds, we invite you to tune in to the latest episode of the Her Money & Investing Show Podcast: Bonds for Beginners. Our special guest, Joanne (Machida) Spears, CRPC™, CSRIC® of Merrill Lynch Wealth Management is discussing the various types of bonds, bond basics, and how you can use them to grow your wealth.
In this show, we cover everything from the fundamentals of bonds to some key aspects people find confusing and how they work in practice. Whether you're a seasoned investor or just starting, this show provides a valuable opportunity to expand your knowledge and learn more about how bonds can fit into your investment strategy.
We hope you love the podcast!
Looking to increase your financial knowledge and strengthen your investing skills? Check out our fantastic HerFinIQ courses. They're designed to help you take control of your finances, make smarter money decisions and invest wisely.
Together, Learning to Build Wealth
Jessica Perrone, Founder, Her Financial IQ Show Host, Her Money & Investing Show
About Her Financial IQ
Her Financial IQ 's mission is to empower women through personal finance and investing education. Through its friendly and approachable curricula, Her Financial IQ is committed to helping women achieve security and wealth through financial literacy. The program teaches crucial financial skills in a way that makes them accessible to women by using examples they can relate to. This down-to-earth approach helps women gain confidence in their financial decision-making. Check out the classes here.
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