Bonds explained in 90 seconds! [Thread]
Wait, what's a bond?
Very simply, it's a loan.
Instead of borrowing money from a bank, a company (or government) will borrow from investors. So investors will give the company money & in exchange they get paid interest (called coupons)
Fancy term for the IOU is "bond issuance"
I'm an investor, how do the mechanics work?
Company sells you a bond for $100 and promises you 5% every year for 3 years. They also pay you $100 at the end.
Yr 1: $5
Yr 2: $5
Yr 3: $5 + $100
That's $115 (or a 15% return) after 3 years. Right?
The real return is closer to 10%
Why are my returns so much lower?
$100 today is worth more than $100 in 3 years from now - yes, inflation!
Even at a modest 1.5% inflation each year, the $100 you give up today is worth less than $96 in 3 years from now.
ILBs (inflation linked bonds) try & help solve this.
How come bonds are always quoted in yields (%s) instead of actual prices like shares?
Bonds have different maturities* & coupons - quoting a percentage makes it easy to compare different bonds & compare against other assets.
*Maturity = time to get paid back (3yrs in example)
