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Interested in buying bonds? Here's how they work…

by , 12 January 2015

Buying bonds can be a great way to reduce the risk in your portfolio.

Bonds tend to have a lower risk attached to them than investing in shares. So they can offset the volatility from shares in your investment portfolio.

But bonds can seem quite complicated. They come with their own ‘language'.

So what terms do you need to know about bonds?

Read on to find out…

What are bonds?

Bonds gives governments and large corporations a way to raise money.

When you buy a bond, you’re effectively lending the government or a company money. For this loan, you’ll receive interest payments. And at the end of the life of the bond, you should receive the full amount back.

If you’re interested in buying bonds, it makes sense to learn more about them. And that includes the terms used when dealing with bonds…

Getting to grips with the terms surrounding bonds

Let’s go through the basics with the help of an example.

You decide to buy a R1,000 government bond. This R1,000 is known as the par value. This is the amount of money you’ll get back at the end of the life of the bond.

The life of a bond is known as the term to maturity. Bonds usually come with terms to maturity ranging from a year to 20-years. The redemption date is the date that a bond matures and the holder receives back the par value.

As payment for lending money to the government or a company by buying a bond, you receive interest payment through the life of the bond.

The interest rate you receive is called the coupon. And when you receive the interest payment, which usually happens twice a year, this is known as the coupon payment.

So there you have it, how bonds work.

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Interested in buying bonds? Here's how they work…
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