Owning Bonds

So far, we've discussed stocks and the difference between stocks and bonds. However, we haven't elaborated on what bonds are and where they are traded. This section discusses bonds and the bond market. While you read, pay attention to how zero-coupon bonds, differed-coupon bonds, and split-coupon bonds differ. You will learn about municipal bonds, which are a way for governments, states, and municipalities to borrow money. Where are corporate bonds and government bonds traded?

Introduction

In common parlance, a bond is an affinity between people. In science, that affinity is physically held together by an attraction of atoms. In finance, a bond is a debt agreement, holding lender and borrower together in a shared financial fate.

Investors buy bonds to participate in economic growth as lenders rather than as shareholders, with less risk and a firmer claim on assets. Bonds are issued by different kinds of organizations – by governments and government agencies as well as by corporations – giving investors different kinds of partners in growth.

Since bonds are a different form of capital than stocks, and since bond investments are made in different kinds of borrowers, bonds offer diversification from the stocks in your portfolio. Your use of bonds may change over time, as your risk tolerance or liquidity needs change.

Creative Commons License This text was adapted by Saylor Academy under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensor.