Introduction To Bonds - What are Bonds?

Pure and simple, bonds are loans. Like a car loan or a home loan, they are legal contracts between lenders (issuers) and borrowers (bondholders). Bond issuers - governments, agencies, municipalities and corporations - have an obligation to repay the loan with interest over a fixed time period. Unlike your familiar car or home loan, bonds are much more marketable - they are bought, sold, and traded every day.

Bonds, though, are not stocks. While stocks, or equity securities, make the holder a partial owner of the issuing firm, bondholders are creditors of the issuer. Bonds are often called fixed income securities because they pay a set interest amount (the coupon) over a defined period of time.

Bonds are also an important part of worldwide politics and economics. In recent years, individual investors have become experts on all the latest techno-gizmos and personalities coming out of Silicon Valley. Many seem to have forgotten that Bond and interest rates movements are often the single most important factor behind overall stock market moves and trends. Bonds are affected much more by "Big Picture" kinds of issues. What makes the economy grow or shrink? What causes inflation? Why does the US Dollar appreciate or depreciate? Will the Government balance the budget?