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Consulting Insights

What is a Bond?

Companies might need money to expand their markets and government might need to fund projects, how do they borrow money?

Have you ever lent money to someone? I guess most of us would answer: Of course, I've done it!. We've either lent money to our parents, siblings or friends at some point of our lives.  They use this money to either pay their debts, buy needs, or anything else. After a certain amount of time, they pay you back.  Sometimes, they even give you some extra cash as a reward for the help you gave before. 
 
What I explained above, is something common in our daily lives, but what do you think happens around companies and government? Well, as a fact, they can also borrow money from us.
Companies might need money to expand their markets or get into a new one and government might need to fund projects.
 
What can they do to get money?

They could either request it through the bank or issue bonds to the public.
Asking for money from the bank is not always the best option, since it involves several restrictions. Besides, the interest that companies pay to investors is less than the interest they would be required to pay to get a bank loan.

A Bond is a loan from a person to a company or government. The amount that was lent is paid back with an interest. As you can see, it can be more profitable to a person to lend money to a government or company, get an extra amount of money from the interests and preserve their capital investment. On the other side, governments and companies have access to the cash they need and they can reinvest it.
 
 The 3 most common types of bonds

T-Bonds: You are lending money to the federal government for a specified period of time. They are called Treasury bonds. These are considered the safest of all investments.

Municipal Bonds: You are lending money to a state or local government entity, which will return a specified amount of interest on a specific maturity date.

Corporate Bonds: You are lending money to the company that is selling it. The company returns money on a specific maturity date. It also pays you a stated rate of interest. But these interest payments are taxable. Also, the borrowers sometimes fail on the debt payments, so this is considered as a riskier type of bond.
 
There are many other types of bonds, there are even more choices than the stock market.
 
When buying bonds, you should review the following:


- Face value- which is the amount that you lend to the company or government
- Maturity-  which is the date that the loan is due and the company or government will give your money back.
- Coupon rate- which is the interest that the company or government will return to you.
 
Why investing in bonds?

Bonds are really appropriate for you if:
- You are planning on retirement and care about safety and not affording to lose your income.
- You care more about generating income and being conservative than risking on stocks or mutual funds, that sometimes can go up, but others lose.
 
In conclusion, there's a lot of information about bonds.  As you can see, they can offer many rewards, but they can also be riskier. The important thing if you want to start investing is to read more about finance and the market, especially on bonds. Also, something really important is to review your expectations, which obviously depend on each person. 
 

Bibliography:
http://www.investopedia.com/
Bonds for Beginners- AOL Course
http://www.investinginbonds.com/
 

Atzin Z.

Atzin was born and raised in Monterrey NL. She has been working for several years in the Quality Assurance field and has a BS in Management Information Systems. One of her favorite things to do is spending time with her dogs and trying to teach them tricks.

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