There are usually several reasons of why we need to borrow money. In the same way, companies, and even governments, might need to borrow money from time to time. However, the sums of money that they borrow are very large. So what they do is that they issue bonds.
What are bonds?
Bonds are basically loans, where you are the lender. The companies or government which borrow the money from you, have to agree not only to pay back the amount they borrowed, but also to pay a little extra in the form of a fee (interest) for the privilege of borrowing your money. These interest payments (coupons) are usually paid at regular intervals. The full amount that is loaned out (the principal) is returned back to the lender (you) at a certain date in future. This date is called the maturity date.
Are bonds are risky?
Although the company whom you lent your money to guarantees to pay you back, it does not mean that bonds are risk-free. Companies and even governments can, and do go bankrupt. However, when that happens, bondholders will be paid first before paying a single rupee to the shareholders.
Interest rates
Bank interest rates are another thing bond investors need to watch out for. Rising bank interest rates cause bond prices to fall, and vice versa. This is because bonds pay a fixed coupon. As bank interest rates fall, people are willing to pay more money for the bond because its fixed coupon may represent a higher return than other similar instruments like the fixed deposits.
Conversely when bank interest rates rise, people are less willing to hold on to bonds because interest income from fixed deposits would be higher than the fixed coupon of bonds issued in the past, hence leading to a fall in bond prices.
So be a smart invester and invest in bonds with a clear mind.
