With Fashion Week around the corner, the city of New York is thinking of opening a new high-end mall to feature all of the new designers and their clothing lines. In order to build the mall, the city of New York needs to borrow money. But instead of borrowing money from the bank, it decides to borrow money from the public, with the issuance of “bonds”.
A loan given to a company or government from an investor (like you).
So why would someone like you give money to the city of New York to build a mall? What do you get out of it? A lot actually. When you decide to lend money to the city of New York, the city of New York will pay you an annual interest rate as a “thank you” for lending them the money in the first place. Once the mall is built, they will give you back your initial payment in full.
For example, the city of New York is offering bonds priced at $1,000 over a 10-year period in exchange for 5% annual interest rate.
So, after paying $1,000 for a bond, you will receive $50 every year for 10 years. Once the 10 years is up, you will get your $1,000 back. Therefore, you made $500 profit from investing $1,000… Not bad right!
The par value (initial price) of your bond is 1000$ with a coupon rate of 5% (yearly interest rate) and a 10 year maturity date.
Buying a bond is a smart way to preserve your money while letting it grow on its own! Bonds are also viewed as safer investing options compared to stocks, since you know exactly how much to expect. Of course, like any investment, bonds still have risk. The risk is much lower than other alternatives, but there is always a possibility that the company or government goes bankrupt and can’t pay back the initial payment (aka default risk).
Usually, institutions with higher default risk provide higher interest rates per year (like corporations) while safer companies provide lower interest rates per year (like governments).
All in all, if you’re looking for a safe investment with stable returns, you might want to consider investing in a secure bond. It’s a great way to preserve your money while letting it grow in your sleep!
Would you invest in a bond? Let us know below!