In this article, we will introduce to you a knowledge that is both familiar and strange in the financial market, which is bonds. Most people have heard of bonds, but very few people can understand clearly and in detail about this type of business. If you are interested in bonds, do not miss our following article.
Watching: What is Bond?
What is a Bond
Bonds, in essence, are a form of long-term borrowing, issued by businesses, authoritative organizations such as the state treasury, or the government. Upon maturity, bondholders will receive principal equal to the bond’s purchase par value and interest calculated according to the provisions stated on the coupons or paid periodically, depending on the bond issuer. .
How do bonds work
?Bonds issued by fundraising companies will include loan terms, timing of interest payments, and principal repayment periods. . Yield is a portion of the profit that bondholders earn when they lend money to an issuer through the purchase of a bond.
Most bonds have a par value of 100,000 VND or more depending on the issuer. The bond issue price will depend on a number of factors such as the reputation of the bond issuer, the maturity date, and the periodic interest rate (coupon). The face value of a bond is what will be returned to the borrower after the bond matures.
If you own bonds, you don’t necessarily have to hold them to maturity, you can sell them to other investors, if you want. Typically, the bond will be repurchased by the borrower if interest rates fall, and new bonds can be reissued at a lower cost.
Bond interest rates and bank rates
An interesting fact is that bonds always tend to go against interest rates, the value of bonds decreases when interest rates rise and will increase when interest rates fall.
The risks of investing in bonds
One of the basic features of a bond is that it allows the issuer to redeem the bond before its maturity date. As a result, the bondholder will receive a principal payment of a higher value than the face value.
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However, the flip side of this is that the investor receives the money himself but cannot reinvest it at the same interest rate. In the long run, reinvestment risk has a negative impact on investment returns.
To overcome this situation, many investors will choose bonds with no callability, to receive higher interest rates.
When inflation increases, the purchasing power of investors will decrease and earn negative yields.
Specifically, assuming a bond investor has the potential to earn a 2% return, if inflation rises to 4% after they invest, the investor’s return would actually be -2 %.
Government bonds are generally considered the safest, as the government has the ability to collect taxes or issue money to repay the debt. However, other bond issuers cannot do so, making corporate bonds risky as well as paying higher interest rates to investors.
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Investing in bonds can create a fixed income stream for investors, but can also sometimes bring risks if investors are not smart enough. However, this is still considered a safe type, especially if you master the basics of bonds, find out familiar market factors, you can also find the types of bonds that bring good returns. high profits.