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Bond Investing Guide: What are Bonds?




You’ve already learned the basics of stock trading and investing in our Stocks Tutorial and Guide. This time, let’s learn another type of financial investment: Bonds.

What are BONDS?

In very simple terms, a bond is an obligation by the borrower (bond issuer) to pay the lender (bondholder) a specific amount of money in the future.

Like stocks, bonds are issued as a way of raising funds. If a company, for example, needs money to expand the business or to pay out loans, they can choose to issue either stocks or bonds in order to raise capital.

What’s the Difference between Stocks and Bonds?

A major difference between a stock and a bond is that stocks do not guarantee any future payment while bonds have a known and specific payment in the future.

This means if you invest in stocks, you are not sure if you can earn sometime in the future because you do not know if the stock price will go up or if you will receive dividends. Companies, even if they are profitable, are not obligated to pay dividends to their shareholders.

Bond issuers, meanwhile, are required to announce a specified coupon interest rate prior to the issue. This guarantees that bondholders will know how much they can earn in the future. If the bond issuer suddenly becomes unable to pay its interest obligations, it is said to be in default.

Bond Investing Terms: Face Value, Maturity Date, Coupon Rate

Let’s define these commonly used bond terms.

The Face Value of the bond is the amount of money the bond issuer borrowed and must be repaid at the end of the loan period.

An issuer who, for example, issued 100 units of bonds worth P1,000 each will have to pay a total of P100,000 (that’s 100 x P1,000). The face value of the bonds, therefore, is P100,000.

The face value is sometimes also called Par Value or Principal.

The end of the loan period is called the Maturity Date. At the maturity date, the bond issuer is required to pay the total amount of the loan borrowed from bondholders.

The amount of money earned from a bond is determined by the Coupon Rate or Interest Rate of that bond. This is always announced prior to the issue. Most bonds pay coupon interest semiannually, that is, every 6 months, although there are some that pay quarterly or annually.

How exactly an investor earns from bond investing will be discussed in Part 2 of our series on How to Invest in Bonds.

(Read the next guide in the series: Bond Investing Guide 2: How to earn from Bonds)


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8 thoughts on “Bond Investing Guide: What are Bonds?”

  1. Philippine Stock Exchange says:

    great tutorial once more! PMT is the best financial information resource ever!

  2. Millionaire Acts says:

    Bonds are generally one of the safest type of investments. But don’t expect a high yield either. The higher the risk, the higher the return but since bonds are one of the safest investments, they also provide low returns.

  3. Jay Castillo says:

    Pardon the ignorance, I just want to ask if the principal is secured meaning the investors are sure it will be returned to them at the time of maturity?

  4. James | PinoyMoneyTalk.com says:

    @javi, long time no hear! musta naman jan?

    @Millionaire Acts, correct. Bonds really are an alternative if investors don’t want huge amount of risks. But, of course, as you said, the returns are also not that high.

    @Jay, of course, there is no 100% assurance that companies (or governments) will return the money owed to bond investors. But as bond issuers, they are obligated to pay. One way to look at the risk associated with bonds is to look at the credit rating of that bond. Those with high credit ratings are supposedly “safe” investments while those with lower ratings are “risky” investments. However, as what we’ve seen during the subprime mortgage mess, even those companies with high credit rating can default on their loans. Generally, however, bonds are still relatively safer compared to stocks.

  5. javi says:

    hi sir! hehehe. ok naman. online, di na ako bumababa sa $1 per day. salamat sa pmt tutorials at keyword hijacking. hehehe. tapos offline, natuloy po ang dealership ko ng mister donut. i am learning a lot there. hehehe. at the same time, im managing/marketing our new galenicals distribution business. hehehe.

  6. john adrian says:

    I’m from the province and new to mutual bonds, where do i start if i want to invest in bonds? can i purchase it online?

  7. James | PinoyMoneyTalk.com says:

    @javi, wow very successful ka na. Pa-burger ka naman! O kaya donut! Hehe…

    @john adrian, that will be part of our later articles on bond investing. But in gist, one way for you to invest in bonds is to visit a bank and ask them about the bond offerings. They should know those things. If they don’t, you need to contact directly the Trust Division of your bank, they’re normally located in the headquarters.

  8. raf says:

    hi are you familiar with the AFPSLAI, PSSLAI of the police and military, is it safe to invest on these associations? they are giving 16-18 persent per annum interest to your investment. where did they invest the money of the depositors to earn that amount of interest? thank u.

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