In this week's millennial money episode, Damien and I tackle jargon terms for beginner investors. This week we discuss, what is a bond?
What is a bond?
A bond is an interesting one because it is effectively a loan that can be traded. A company can raise money in a number of ways and one way is to basically issue debt. With a bond, a company essentially uses your money as a loan. Imagine the company was Tesco for example, and Tesco wanted to raise some money. It might decide to borrow money in the form of a loan. By taking out a loan, Tesco would have to repay the money it borrows, as well as interest. So with a bond, it works in the same way, but you can sell that bond. The person who owns the bond is the person who is owed interest from the loan payment. So a bond is essentially a loan to a large company or the government. As an investment type it is relatively low risk as the likelihood of the loan not being repaid is very low. It is because of this reason that the interest rate is also low.
If you choose to lend to the government, this is known as a gilt. You can buy a gilt or a gilt fund. These loan terms are typically around 30 years so the likelihood of you holding it for that long is quite slim. When it comes to selling the bond or gilt, how much you get for it will depend on the market value, the amount of time left on the loan, the interest payments and the creditworthiness of the company.
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