PLS HELP Activity Sheet 1: About Bonds
Part 1: What is a Bond?
Bonds are issued by corporations, governments and government agencies to raise large amounts of money. Just like any loan, the issuer, or organization trying to sell the bond, agrees to pay back the money borrowed on a set date and agrees to pay interest. Interest is money paid by the lender to the borrower in addition to the amount borrowed for use of the money.
Investors buy investment grade bonds because they are considered very safe investments. They are issued by corporations and governments who are considered very trustworthy. These issuers always pay the interest and the loan back when they promise; Bonds can take anytime from a few weeks to thirty years to mature. Of course, just like a friend can refuse or be unable to pay all or part of an IOU an issuer can refuse or default on a bond but it is unlikely this will happen when you buy investment grade bonds. Today we will learn about the safest kind of bonds. Investment grade bonds are the most likely to be repaid on time. Let’s look at an example:
You buy a U. S. Government 10-year Treasury bond on the day it is issued -- let’s say January 1st and the bond has a $1000 face (or par) value. This means you have given our federal government a 10-year loan, which means that on December 31 ten years from now, Uncle Sam will write you a check for $1000 to repay the loan. Let’s also assume that your 10-year Treasury bond had an interest rate (or coupon rate) of 5 percent, the government will also pay you $50 per year over the 10-year life of the bond for the privilege of using your money. Interest on most bonds does not compound.
1. How is a bond like an IOU?
2. Why is an investment grade bond is considered a “safe” investment? 3. How can an investor make money by buying a bond?
4. Would you recommend your Stock Market Game team include a bond in your portfolio? Why, why not?