What is a Bond?

Published: 03/04/23

Hello! Today’s topic is: Bonds.

A Bond is an investment where you loan your money to a business or, more typically, the government. A bond is among one of the safest investments you can make. When you buy a bond, you are effectively giving your money to the government or business, and after a set amount of time, they will pay you back in full with interest that is set when you purchase your bond.

The great thing about bonds is that the profits that are set prior to purchasing the bond are almost guaranteed. The only scenario in which you won’t receive your money is if the government gets overthrown or the business goes under.

For example, the current US Bond rate on a 7 year bond is 4.41%. So, if you were to give the US Government $100, they will guarantee to give you back $104.41 seven years from now. Yes, this does seem like a very low increase, especially over this long period of time, and the reason for this is because this type of investment is as close to zero risk as you can get. While it does beat keeping the money stashed in a piggy bank or in a savings account, you do profit much less compared with stocks and ETFs.

Typically, the younger you are, the riskier you should be with your investments. If you are in your 20s or early 30s, you can afford to take some risks, because if they pay off, you can retire earlier than expected, and if they don’t, you still have decades to make up for the loss. This changes when you are in your late 50s or 60s and actively thinking about when you should retire. This is typically the age range which has their money stored in bonds because that security is very important.

The one downside to bonds is its liquidity. If all of sudden you really need those $100 from the bond you invested in, it is difficult to take your money out, and usually involves a penalty on the earnings of your bond.

Make sure you think about what type of investor you are right now, and the risk level you are comfortable with. As always, remember, the early you invest, the more compound interest will help you make more money.