Previous Lecture Complete and continue  


What are bonds?

Bonds are long-term debt instruments otherwise known as, an IOU, or promise to pay, that is issued by corporations and governments. A bondholder has a contractual right to receive periodic interest payments plus return of the bond’s face, or par, value (the stated value given on the certificate) at maturity (typically 10 to 30 years from the date issued).

*For Example:

Let's say you purchased a $1,000 bond paying 9% interest in semiannual installments. You would receive an interest payment equal to $1,000 × 9% × ½ year = $45 every six months. At maturity you would also receive the bond’s $1,000 face value. Bonds vary a great deal in terms of liquidity, so they may or may not be easy to sell prior to maturity.

Since 1900, the average annual rate of return on long-term government bonds has been about 5%. Corporate bonds are riskier because they are not backed by the full faith and credit of the U.S. government and, therefore, tend to offer slightly higher returns than government bonds provide.

If you had your choice, and one day you just might, which would you go for if you could only choose one type of bond, U.S. Government Bonds or Coprorate Bonds and why? Enter your answers below in the comment box.