Bonds

Another way of making passive income is to buy bonds from the government or corporations. Bonds are simply contracting loans given by investors to the government or corporations, who in return are paid interests by these bodies. The investor loans money to the issuer who now owes the investor. Bonds are more secure and less risky as compared to stocks. To fully understand the concept of bond investment, some investors acquire knowledge by taking online courses like "Advanced Investment Courses (DVD) by Professor Steve L. Stezak"

Alternatively, people can understand the principles of bond investment by reading books such as " The Strategic Bond Investor " and " The Bond Book"

The terminology used in bonds

 Face or Par Value: Is the principal amount of money that the investor purchases the bond.
Coupon or Interest rate: Is the annual percentage interest paid on the principal amount of the bond, normally paid in the form of a dividend, quarterly, semi-annually or annually, can be fixed or variable.
Maturity date: How long it will take for the principal to be repaid back to the investor.

Categories of bonds (Types of Bonds), generally there are two categories of bonds. Secure and insecure bonds:
  Secure bonds are when the issuer has some collaterals which are repayment securities. When a corporation issues bonds they provide their assets, buildings as collateral in the event they can not payback.
 Unsecured bonds, on the other hand, do not have collaterals however they usually come with higher interest than secure bonds.
Why do the government or corporations issue bonds (Why issue Bonds)? 
Similar to stocks, the government or cooperation issue bonds to the public in order to raise capital to execute their projects. 
The government might want to build new infrastructures like roads and bridges but fell short of money, they will then issue bonds to the public to raise the money. Equally a company might want to expand and will issue bonds to the public to raise the capital needed for expansion. It is advisable for investors to be acquainted by taking online courses:  
"Understanding and Investing in Bonds". Is a good course on bond investment.

 Here is a scenario
The city of New York wants to build a new science center, it decides to issue a bond to investors to raise money, each bond cost $1000 ( face value). The city of New York promises to pay back in 10 years ( Maturity), they also decide to pay an annual interest of 5% (APR or coupon rate) to the investor.
            Face value: $1000
            Maturity 10 years
            Coupon rate 5%(interest) annually
Peter as an investor buys the bond for $1000, each year the city of New York pays Peter an interest of $50 for 10 years. Once the bond reaches maturity, Peter now redeems the bond and the city of New York returns his $1000 principal.
Within 10 years Peter received an interest payment of $500.
Why do people buy bonds? To preserve money and make some interest at the same time. People buy bonds also to make money when you buy a bond the issuer just as I mentioned earlier it is like loaning money to the issuer, they pay you back the interest while your main principal will be held till the end of the contract. Think of it this way, you give out money and interest will be paid to you quarterly, semi-annually or annually based on the agreed percentage and your principal will be returned to you at the end of the bond contract.

 In the case of Peter above, he preserved his $1000 principal which was returned to him at maturity and also received interest payment in the form of a dividend of $500

Think of a bond as a kind of loan. When you buy a bond, you give a government or corporation a sum of money in exchange for the promise of interest payments for a specified period. At the end of that period when the bond matures the interest payments stop and your initial investment is returned to you.

 Where are bonds sold? Bonds are also bought from local banks and brokers. The government or corporation can buy directly from the bank while investors who want to buy a bond from the issuer go through the brokers.
During the process of buying a bond, the banks make money by a one-time underlining rate(charge). Take for example the case for Peter above, the city of New York needs a platform to sell the bond and this is executed by the bank after reviewing their health check and accepting the bond. The bank will now issue the bond to Peter with a one time underlining cost of about $5, hence he will buy it for $1005.

Here are some types of bonds

Collateral trust bond. This bond includes the investment holdings of the issuer as collateral.

Convertible bond. This bond can be converted into the common stock of the issuer at a predetermined conversion ratio.

Debenture. This bond has no collateral associated with it. A variation is the subordinated debenture, which has junior rights to the collateral.

Deferred interest bond. This bond offers little or no interest at the start of the bond term, and more interest near the end. The format is useful for businesses currently having little cash with which to pay interest.

Guaranteed bond. The payments associated with this bond are guaranteed by a third party, which can result in a lower effective interest rate for the issuer.

Income bond. The issuer is only obligated to make interest payments to bondholders if the issuer or a specific project earns a profit. If the bond terms allow for cumulative interest, then the unpaid interest will accumulate until there is sufficient income to pay the amounts owed.

Mortgage bond. This bond is backed by real estate or equipment owned by the issuer.


How to decide which bond to buy? There are credit rating agencies that rank bonds using different criteria one of them being the ability to repay. Investors will normally check this rating which ranges from A to F. Government bonds are more stable than corporate bonds because companies can go bankrupt. The more stable the bond, the lower the coupon rate.

 Every investment comes with a risk, investors should do their due diligence by researching companies before buying their bonds to mitigate the risk or refer to credit rating companies about the status of the bond

 Risk in buying Bonds.
The government or the corporation can fail to pay the investor back. The companies can go bankrupt or a change of management may affect their ability to pay. Nevertheless, federal government bonds are more stable and less risky than any other bond.

 Change of the interest rate. Let’s say after a couple of years the rate changes from 5% to 4%, that means the person with a 5% are better off than someone with 4% inflation
Where do people learn about bond? 
The irony is that, similarly to the stock market, bond investment is also not thought in the university. However, people can learn about it by reading eBooks like "The Intelligent Investing" and taking online courses like "Advanced Investment Courses (DVD) by Professor Steve L. Stezak"

 And reading bond investment books such as. "The Strategic Bond Investor",  "The Bond Book" or "Investing in Bonds for Dummies"