Bonds

A bond is a debt instrument issued by a company to raise capital. In exchange for buying bonds, investors are given a return on their investment, typically around 5 percent annually. On a $1,000 bond this would be equal to $50 per year in interest. Depending on the yield to maturity, or YTM, on the bond, this can result in a significant return over time. When bank account return rates are low, investing in a long-term bond can be a good investment strategy.

Short Term and Long Term

Contrary to what might be expected, short-term bonds are not as significantly affected by a rise in interest rates as long-term bonds. Likewise, a fixed-interest bond is also more affected by a rise in interest rates than a bond with a variable interest rate. This is because a long-term bond with a fixed return is based on several years’ expected returns, namely at the exact same rate per year. If that rate is now less than other available bonds, the overall value of the bond needs to be heavily discounted to sell it.

Holding On

References

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