Say you are in the supermarket with a friend on a Friday afternoon and see something you need for your home, a broom, for example. Despite receiving a paycheck the next day, ask your shopping buddy to borrow some money to buy the broom now, in return for not only will pay them tomorrow, but also buy dinner. Your friend, find these conditions acceptable, lending money and buying the item. This is essentially what happens in the business world, when a company issues bonds. In general, as a business grows, does not generate enough money internally to pay for supplies and equipment needed to maintain growth. Because of this, most companies have one of two options.
They can either:
1. Sell a part of the company to the general public by issuing additional shares, or may
2. The bond issue.
When a company issues bonds, it is borrowing money from investors in exchange for promises to pay interest at specified intervals over a period of time. In essence, the same as a mortgage only you, the investor, are the bank.
Why would anyone invest in bonds?
Almost everyone knows that in the long run, nothing is better than the stock market. This being the case, why would anyone invest in bonds? Although it’s pale in comparison with the actions in the long term, bonds have several features.
First is the preservation of capital. Unless a company declares bankruptcy, a bondholder can be almost completely sure that they will receive the amount originally invested. The shares, which are subordinated to bonds, are the most affected by unfavorable developments.
Second, the bonds pay interest at intervals of time, which can provide valuable income for retired couples, people, or those who need cash flow.
For example, if someone owned $ 100,000 in bonds paying 8% interest per annum (which would be $ 8,000 per year), a fraction of that interest will be sent to holders of bonds of the monthly or quarterly basis, giving them money to live or invest elsewhere. The bonds may also have tax advantages for some people. When a government or municipality issues of various types of bonds to raise money to build bridges, roads, etc., the interest you earn is tax free.
This can be especially advantageous for those who have retired or want to minimize your total tax liability.
Happy investing
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