The basics of bonds explained

Pretty much everyone understands what a share in a company is, and many people invest in the stock market. But not so many private investors buy bonds, or perhaps even understand them.

Yet the bond is a very simple product: at base, you loan a company (or government) money, and they pay it back to you, with a fixed rate of interest as your financial reward for lending them that money. The term of the loan can vary, and can be called a short term loan or a long term loan, but the core idea is the same.

Typically a bond will have something called a "redemption date" which it at a fixed and clearly defined point in the future. This refers to the time at which put simply you get your money back. Ordinarily this means on that date you get returned 100% of the money that you lent when you took out that bond in the first place.

Generally, the shorter the term of the bond, the less risky it is, and the longer the term, the riskier it is. This is always the case in life - there is more time, which means more opportunity, for something to go wrong, something unexpected to crop up and so on - so risk increases with a longer time period as a natural corollary of this inalienable fact about life.

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