Even if you’re a complete newcomer to the world of capital markets, you probably understand more about bonds than you realise. A ‘bond’ is a type of ‘debt’. Deposits are classified as a type of bank debt. The bank must repay you at maturity You can start to understand some of the concepts of a bond investment.
Simply, when an investor purchases a bond it represents a loan to the bond’s issuer, which could be a bank, government, or corporation, in exchange for regular interest payments, over a set period of time, plus repayment of the face value of the bond when it matures.
A key feature of a bond that separates it from shares (otherwise known as equities) is that an investor will receive regular income and the initial value of their investment at maturity as long as the issuer continues to operate. For the vast majority of bonds, you can rely on these payments. For example, if you invest in a 10-year Australian Government bond you will continue to receive income on that bond until the bond matures unless the Reserve Bank of Australia (RBA) defaults.
This is why bonds come under a category known as ‘fixed income’. Although there are several forms of bonds, they are typically considered defensive assets, although some pay equity like returns and are higher risk
For more information on bonds and the benefits of investing in bonds read the full wire post
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