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Financial Literacy

Financial Literacy


There are a lot of bonds out there. There's 007 sipping his martini by the bar, of course, and then there's the super bond adhesive that your sister somehow used to glue her My Little Pony to her ankle. (Yeah, that was an exciting trip to the emergency room.)

Wrong Bond.

Most dictionaries define bond as an agreement, and that's kind of how Wall Street guys and gals look at it, too.

In the financial world, a bond is an agreement to pay back money. A company (or government) can issue bonds to raise money for its debts; you can buy these bonds, and the company will pay you interest (read: extra money) for giving them the cash and taking on the risk.

So when you buy a bond, you're essentially buying a tiny chunk of a company's debt with the promise that the money will be paid back with interest.

Bonds are usually seen as more stable than stocks because companies and governments issuing them are promising to pay you back. Since there's less risk, there's also less chance for glory (er, profit). Since you're promised your money back and you're not buying a piece of the company itself (the way you would with stocks), you don't have a chance to get a huge return on your investment, no matter how well the company does.

Bonds have usually been seen as a little ho-hum, a little vanilla. They're handy because they're stable, but they don't have the flash and sizzle of stocks, which have a bigger potential for growth. Think of stocks as Channing Tatum in a convertible and bonds as Adam Sandler in a rusty VW. Both have acting talent, but one is more likely to turn heads.

To spice things up a bit, some companies have been issuing bonds that are meant to look a little more like stocks. You can find companies that have nine different types of bonds, including preferred, senior, junior, and so on. There are even convertible bonds (see—they really are going for the glam) and debenture bonds, each of which may have slightly different rates of return and slightly different perks.

But, no matter how glammed up they are, these investments are still a piece of a company's debt pie. Nom nom.

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