Bonds

Introduction

A bond is simply debt written in certificates which states the amount borrowed, the interest in which the issuer would pay the creditor and the time where the amount borrowed would be paid back. For us individuals, borrowing money from someone is not that hard depending on the amount asked like food money, grocery or a pack of cigarettes. It only gets harder for us to borrow money as the amount asked gets bigger like 1 billion? who would loan us that kind of money without digging into our financial statements that we are actually capable of paying back the loan. For corporations, when the sale of stock and its own cash from operating activities isn't enough to finance a major expansion project, it resorts to taking in debt. For instance, if a company needed to raise 5 billion Pounds to open up bases in 20 different countries, there is a possibility that the bank would not be able to produce that huge amount. That's where bonds come in handy, where no single creditor is responsible for the entire amount needed by the company. Think about this, say you need to buy a house but because you can't get financed by banks or other financial institutions, you would not be able to purchase the house worth say 1 million Euros. There is another option, you got 100 relatives and friends which you think would lend you 10,000 Euros each, but because of the amount, you need to convince them that you can pay each one of them. Also, to raise the likelihood that they would loan you out 10,000 Euros, you need to attract them with a high interest rate. Issuing bonds would deliver the amount required by a corporation or a government from a pool of investors.

In comparison, bonds are fixed income and less riskier than stocks. Although bond returns are less than stocks, it is a more stable capital preservation tool when greater amounts are invested. In an event of a liquidation, creditors are paid first with the company's remaining assets before stockholders.

Introduction

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