Forum 3 Oct

Point 1: Introduction to Bonds

What are Bonds?

Bonds are debt instruments that allow entities (such as governments, municipalities, and corporations) to raise capital by borrowing money from investors. When you purchase a bond, you are essentially lending money to the issuer in exchange for periodic interest payments and the return of the bond's face value when it matures.

How Do Bonds Work?

1. Issuance:

   • When an entity needs funds, it issues bonds to investors. Each bond has a face value (typically $1,000), a fixed interest rate (or coupon rate), and a maturity date (the date when the principal must be repaid).

2. Interest Payments:

   • Investors receive regular interest payments (coupons) based on the bond’s coupon rate. For example, a bond with a 5% coupon rate pays $50 annually for a $1,000 bond.

3. Maturity:

   • At maturity, the issuer repays the bond’s face value to the investor. Bonds can have various maturities, ranging from short-term (a few months to a couple of years) to long-term (up to 30 years or more).

Different Types of Bonds:

1. Government Bonds:

   • Issued by national governments (e.g., U.S. Treasury bonds). They are generally considered low-risk, as they are backed by the government’s ability to raise taxes.

2. Municipal Bonds:

   • Issued by states, cities, or other local government entities. Often used to finance public projects. They can offer tax advantages, such as being exempt from federal taxes.

3. Corporate Bonds:

   • Issued by companies to raise capital for various purposes, such as expanding operations. These bonds usually offer higher yields than government bonds but come with higher risk, depending on the company's creditworthiness.

4. High-Yield Bonds:

   • Also known as junk bonds, these are issued by companies with lower credit ratings. They offer higher interest rates to compensate for the increased risk of default.

Share Your Experiences:

• Participants can share their understanding or experiences with bonds. This could include:
  • Types of bonds they have invested in.
  • Their reasons for choosing bonds over other investment options.
  • Any challenges faced while investing in bonds.