People often put some money aside. Sometimes like a nest egg and sometimes saving them for a particular purpose, e.g. for a couch or a car. Often they open an account at a bank where the money put down for a long time. The bank pays interest annually on this account. You can also save money by e.g. a bond to buy the stock. Often do you get a higher interest rate than the bank.
What is a bond?
A bond is a negotiable debt instrument of a government or business. Most governments, but many companies spend more money than they have. To purify shortage they often borrow money on the capital in the form of a bond. Thus, the Dutch government in the past, many bonds issued with different maturities and different annual interest payments. Investors can participate in these loans, usually in multiples of € 1,000, -. Nearly all pension funds but also many individuals buy these bonds.
What is the advantage of a bond?
The main advantage of a bond is that every day a price, and you can sell it so every day. Another advantage is that you usually get more interest than a standard savings account with the bank. In general, interest paid annually, sometimes more.
How does a bond?
When the Dutch government needs money she can write a bond on the capital. The issuer stating how much they want to borrow, eg € 2 billion, for how long e.g. 10 years and the annual interest it is willing to pay instance 4%. Through a bank or broker interested can buy these bonds in multiples of € 1,000, -. Usually the issue price 100%. During the term, the value of the bond vary. This depends on the interest on the capital market. When interest rates fall, everyone wants the bond pays annual interest at 4% have. The value of the bond will rise. Conversely, at an interest rate increase the value of bonds fall. The bond returns at the end always 100% (if you do not sell at least intermediate).
What are the risks of investing in a bond?
The companies or governments that issue bonds are not all equally strong. We call this the creditworthiness of the company. Bonds get a report card type of rating agencies, organizations that assess the creditworthiness of the company. Governments generally get the highest credit rating (AAA usually known as Triple-A) can vary considerably among companies. As the grade ends up later in the alphabet, the less credit and the likelihood that the company can redeem the bond reduced.