I want to buy some corporate bonds. Verizon recently issued a record amount and I’m thinking about getting in on the 10 year 5.15% tranche before they become too popular 😕 Making over 5% return a year doesn’t sound too bad 🙂 On a risk adjusted bases this BBB+ bond offering is probably one of the best investment opportunities out there today \(^_^)/
What Is A Bond?
(Besides a spy who drinks martinis and works for the British Secret Services)
A bond is a loan between a lender and a borrower. It’s basically an I.O.U. contract 🙂 Normally consumers borrow from banks. For example someone gets a $10,000 loan from BMO so they can buy a car. A bond is similar, but the other way around 😎 which means the bank borrows money from the consumer and of course pays interest to the consumer. Sounds like a sweet deal doesn’t it? 😀 Anyone else interested to buy some bonds with me? I’ve only bought bond funds in the past, but never individual names before. But hey, we learn by doing 🙂 and sometimes that means stepping outside of our comfort zone.
How A Bond Works
Let’s say BMO bank wants to borrow $10,000 to buy a company car. It wants to give itself 10 years to pay off the loan and offers a 5% interest rate to whoever lends it the money. First BMO issues a bond with those details and the bond is put up for sale. Now let’s say you decide to buy this bond. You would lend BMO $10,000 of your own money in exchange for this bond. Every year BMO pays you $500 in interest. When the bond matures at the end of the 10 year period, the bank would return your original $10,000 principle and the bond contract ends. Congrats. You turned your $10,000 investment into $15,000 over 10 years. Much better performance than storing that money in a savings account or GIC eh? 🙂 Bonds are usually safer than stocks because creditors are senior to shareholders. In other words, if BMO somehow goes bankrupt they have to liquidate and try to pay back your $10,000 principle in full before the stock holders get any money. 😀
Every bond issued will have 3 important numbers that investors should be aware of. The Face Value, the Coupon (interest rate,) and the Maturity date. In our example, these numbers are $10,000, 5%, and some time in 2023 respectively.
Why Don’t Bloggers Talk About Bonds More Often?
The bond market is actually larger than the stock market. More bonds are traded everyday than stocks. And bonds influence our economy, mortgage rates, and everyday lives in general way more than stocks do. So bonds are popular, at least among investors. But bonds can become complicated by interest rates, credit ratings, timing restrictions, and other factors which make them difficult for the mainstream consumer to understand. Investopedia has more info about this asset class if you’re interested in exploring bonds further.
Random Useless Fact: All species of mammals have about the same number of heartbeats in their lifetimes.