When you buy a bond loaning a sum of money to its issuer for a predetermined period of time. In exchange the issuer promises to make regular interest payments at a predetermined rate until the bond becomes due and then repay your initial investment or principal upon maturity.
There are a number of key considerations when assessing a bond: time, interest rate, the issuer and the economic environment. The price of every bond will reflect the likelihood of being paid back. And there are lots of variables. For example it’s possible to change the length of that loan.
If the term changes from say five years to twenty years, that’s far more time for the company to go bust, interest rates to change and for inflation to rise. Though there’s a downside to buying bonds in many cases they’re considered quite a safe proposition.
Like all investments bonds carry a risk and there’s the possibility that you could be left with less than your initial investment.
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