Frequently Asked Questions About Bonds
A bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments. They are alternative investment solutions to stocks which are less volatile and risky and when held to maturity, can offer investors more stable and consistent returns.
- Face Value: is the money amount the bond will be worth at maturity; it is also the reference amount the bond issuer uses when calculating interest payments.
- Coupon Rate: is the rate of interest the bond issuer will pay on the face value of the bond, expressed as a percentage. (E.g. a 5% coupon rate means that bondholders will receive 5% x $1,000,000 face value = $50,000 annually).
- Coupon Dates: are the dates on which the bond issuer will make interest payments. Payments can be made in any interval, but the standard is semi-annual payments.
- Maturity Date: is the date on which the bond will mature and the bond issuer will pay the bondholder the face value of the bond.
- Issue Price: is the price at which the bond issuer originally sells the bonds.
The type of bond you choose is dependent on a number of factors such as your risk profile, your investment goals etc.
An investor should have a portion of their portfolio in bonds as a diversifier since they have different characteristics from stocks.
Investors can create a portfolio which comprises of Corporate, Government or Municipal bonds through the help of a Cumax Wealth advisor to create a well-balanced income-generating portfolio.
Investors can also gain exposure in bonds by investing in a bond fund (a unit trust) that exclusively holds bonds in its portfolio. These funds are convenient since they are usually low-cost and contain a broad base of diversified bonds so you don't need to do your research to identify specific issues.