In my never ending quest to find an appropriate, low maintenance financial baby shower gift I decided, “What the hay, I’ll read up on some more options before settling on a 529 College Savings Plan.” As I’m researching, I see a few new terms on the table and find, “Bond, James bond,” but now, because I am on season 8 of my annual The Office re-watch, I see “Scarn, Michael Scarn.”
I am having a Michael Scott moment. For those of you unfamiliar, Michael Scott is the more than eccentric regional manager at the Scranton branch of the Dunder Mifflin Paper Company. He often arrives to nicknames or remembers key facts through a series of associations like mine above. But to the point – what the heck is a bond? It’s something I feel like older generations talk about. I can certainly remember my grandparents talking about T-Bills. I am also sure Michael Scott has no idea, but if he did, you know it would be by way of an acronym set to song. I hope you’ll settle for 007 facts on bonds – don’t worry these facts are shaken, not stirred.
1. Bonds are basically are a big ol’ IOU
Bonds are a form of debt, like a loan – only the tables have turned. YOU are the bank. Companies, cities, and the government borrow your money and promise to pay you back with regular interest.
2. Bonds are considered a safe investment (depending on the type and issue: see #3)
Depending on the type of bond being purchased, investors often turn to bonds during market volatility based on the steady stream of income. Younger investors are encouraged to carve out a chunk of their portfolios with bonds to help balance riskier investments.
3. Bonds have a risk spectrum
The risk factor of a bond is dependent upon the credibility of and payment history of the issuer. Extremely risky bonds yield a higher return, but are appropriately called Junk Bonds. Treasurys, backed by the “full faith and credit” of the U.S. government are deemed virtually risk-free, but return a lower yield.
4. Some bonds have tax breaks
Specific bonds issued by municipalities or the government, for projects like roads or bridges, return interest that is tax exempt. This can be helpful for people in retirement trying to minimize the taxes they have to pay.
5. Like a fine wine or your little brother, bonds mature with age.
The maturity date is the date on which the original bond amount (the principal) becomes due and is repaid to the investor. At this point interest payments stop.
6. The first bonds were issued in the 1600s
Dutch East India Company was documented as the first company to sell bonds. Similarly DEAC held the world’s first IPO.
007. Wait, you have a coupon?
The coupon is the amount of interest paid back to the investor, dependent upon the terms of the bond. It is named after a small coupon that was once attached to the bond certificate that old-timey people would use to redeem their payment.
What I have found? Bonds are nothing like James bond or Michael Scarn and they are certainly nowhere near as exciting as Threat Level Midnight. My search continues, but I sure did learn something about bonds!
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