Bonds
a.k.a. Fixed income, Treasuries, Gilts
Loans to a government or company that pay regular interest and return the original amount on a set date.
Buy a bond and you are lending money. The borrower pays you interest (the coupon) and hands back the original sum (the face value) when the bond matures.
Bonds trade between investors, and their prices move opposite to interest rates. When rates rise, older bonds paying less become less attractive, so their prices drop. Government bond yields are watched closely by forex traders, because they hint at where a currency is heading.
Collecting a coupon
- A bond with a $1,000 face value pays a 5% coupon.
- Interest each year: $1,000 × 5% = $50.
- Hold to maturity and you also get the $1,000 back.
Bottom line: If rates jump to 6%, new bonds pay $60, so yours would sell for less than $1,000 before maturity.
Thinking bonds can never lose money. Their prices fall when rates rise, and a borrower can fail to pay.
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