Investing money can take many different avenues. You can invest your money into traditional investments such as stocks and bonds, or you can lend money to a specific person for start-up costs for a business. An investment occurs when you lend money to someone who will pay you back with interest, pay you back in the businesses income, or trade the ownership you have in that company.
Bonds, one of the most common types of investments, are loans from the lender to a corporation or a government. These corporations and governments use the money they raise from the loans to build their business and run the government.
A bond is most often issued at $1,000. One bond will cost $1,000. If you buy savings bonds you can buy them in other denominations such as $25, $50, $100, etc. Savings bonds are common gifts for birthdays and graduations, so you might even have a few yourself.
There are a few different ways to earn money from a bond investment. The most obvious is through interest. If you buy a $1,000 bond with a 3% interest rate, you will be paid $30 a year. You will get your payment annually, semiannually, or sometimes they pay it all at once at the end when the initial loan is repaid.
The second way to earn money from a bond is through paying a discount or premium. Paying a premium is actually going to cost you money, but if you have a high interest rate, it shouldn’t be a big deal. For example, you could buy a $1,000 bond for $950. You will be repaid $1,000 at the end which would give you a $50 profit in addition to the interest earned.
The third way you can make money with a bond is by trading them. You can trade bonds just like you can trade stocks. Bonds may mature anywhere from 6 months to 30 years and in that time you can sell them to others or buy them. If you sell them for more than what you paid, you will have made a profit.
Here is a bond example. Let’s say a corporation is selling $1,000 bonds and you want to buy 5. They are selling for $980 each at an interest rate of 5%, and they mature in 5 years. You buy 5 bonds and pay $4,900 with a $5,000 face value. Each year you make $250 and in year five you make $250 plus you are repaid $5,000. You make a total of $1,350 which includes $1,250 for five years of interest plus $100 from the discount rate you bought it at.
You could have sold any amount of these bonds before maturity if anyone was willing to pay for them. Bonds are better off for those closer to retirement. Unless you are planning to invest in junk bonds and do a lot of trading, you will not make as much as you would in the stock market.
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