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Bonds: What are they?

What are Bonds? Simply put, they’re a loan that you give out to businesses or governments, that come with a promise that you’ll receive your initial money back in addition to any interest you might have earned. Governments and big businesses are always needing money to fund new projects and developments, and selling out bonds is one of the ways they can do this. In the investment world, bonds are considered to be one of the safest forms of investment. Unlike shares or stocks, bonds come with a guarantee; there is still risk to be had if you’re not buying bonds from a company/government with a proven track record.

USSR treasury bond (1982)

USSR treasury bond (1982)

These types of investment can be plotted into two different categories: government and corporate. Government bonds are considered to be less risky than corporate bonds; as it’s much more likely for a single company to default on it’s debts rather than an entire government. That being said, you should never assume that bonds come with a risk-free tag! It is fully possible for a government or a local establishment to delay or even default on all of their loans, which would render your investment worthless.

With great risk, comes great reward. Corporations are profit-driven machines that will do almost anything to generate some extra income. As a result of this, the interest rates from corporate bonds will typically be much higher than investing in a government alternative. Every company has a credit rating/history; such ratings will affect the risk and reward of each investment opportunity.

For those looking to invest their money in a moderately low-risk solution, then I recommend bonds as a brilliant way to earn some extra money. I also urge you to approach all kinds of investing with caution. There will be companies, and sometimes even local governments, that will try and convince you into a loan-investment which is less than secure.