Free Stock Market Course for Beginners! Part 4 Bonds

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Chapters:
00:00 What is a Bond?
02:36 How Bonds Work
04:11 Enticements
06:31 Maturity
07:54 Why Invest in Bonds?
10:19 Risk of Default

Module 2 Section 3
What is a Bond?
Stocks represent ownership of a company. Bonds represent debt of a company.
Bonds can be issued by:
A private or public company,
Municipality,
State or federal agency (Fannie Mae, Freddie Mac),
The Federal Government (sovereign debt).
Bonds also trade publicly and can be bought or sold on various exchanges through brokerage accounts or directly through government programs.
How Bonds Work
An entity may decide to raise money for a particular purpose:
This could be to:
build a factory,
build a library,
improve roads,
buy another company.
Rather than use money it already possesses (or doesn’t possess), a bond is created to raise money for a certain purpose.
Used as an alternative to bank loans.
New debt is issued in the Primary Market.
Already existing debt can be traded in the Secondary Market.
Enticements
In return for “loaning” money for a specified period of time, the lender receives interest.
Typically, the interest rate is established when the bond is created and stays the same as long as the bond exists. However, this can vary.
Generally, the greater the risk an Investor is willing to assume, the greater/higher the interest rate.
Bonds are rated by rating agencies. The higher the quality, the lower the interest rate.
The main rating agencies include:
Standard and Poor's, Moody’s, and Fitch.
Bonds rated below a certain rating are referred to as “Junk Bonds.”
Maturity
Bonds have a maturity date.
If a bond has a maturity of 10 years, the bond issuer promises to pay back all of the borrowed money when the bond matures.
An investor (creditor) will not only receive all money back, they will also receive the interest that was promised when the bond was purchased.
There are variations of this, such as zero-coupon bonds or discount bonds.
Why Invest in Bonds?
As a general rule of thumb, many investors decide to manage a portfolio using different investment vehicles during different stages of their lives.
Typically, stocks are used for capital appreciation and are often seen as riskier than bonds (Risk-On).
As one enters retirement, stocks are often replaced by bonds. Interest is paid that can be used as income (Risk-Off).
Interest payments are different than dividends.
Risk of Default
Bonds can also have a default risk.
When a bond is issued, there is a risk that the issuer will not be able to pay the amount borrowed back to the lender, or in this case, the bondholder.
There is also a risk that interest payments may not be able to be made.
The greater the risk of default, the higher the interest rate will be.
As with Stocks, Bonds have different levels of risk.