From the course: Financial Basics Everyone Should Know

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How bonds work

How bonds work

From the course: Financial Basics Everyone Should Know

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How bonds work

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- [Instructor] If you think stocks are too risky, then bonds are often a good alternative. When you are a stockholder, you are a true owner of the firm. Owners of bonds, on the other hand, are debt holders or creditors. A bond is a type of debt or a long-term promissory note issued by a borrower promising its holder a predetermined and fixed amount of interest per year, and then repayment of the principle at maturity. Essentially, if you own a bond, you know exactly how much the company has promised to pay you each year, plus they've promised to give you all of your original investment back when the bond comes due in the future. Bonds are issued by corporations, by the US government, by state and local municipalities, and a variety of our other organizations. There are five major features of a bond that investors like you need to pay attention to when evaluating that bond. The first is par value. Par value is the face value of the bond. It's what's returned to bond holders at…

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