How are bonds an effective investment tool? Okay, here’s the lowdown on how bonds work. The best thing to start first is to compare bonds with loans. Yes, they have similarities, but the key difference is that a bond need not be held to maturity by the same party, it can be traded before then. A loan, however, is strictly held between two parties.
So, this answers a key question I had about bonds. Must you be limited to receiving the payments on the coupon schedule until the maturity date? No, unless the bond is of the investment type that must be held to maturity. If you’d otherwise feel inclined to get the value out of the bond faster, you can trade the bond for other instruments. So, you need not worry about needing to create a loan and then use a bond to pay back the loan. You can just go straight away with bonds.
Other good info about bonds. Bonds are dependent on the interest rates, but if they are held to maturity, they should pay back their full principal value even in the face of fluctuating interest rates. The disadvantage mainly comes from trading before maturity. Bonds are pretty good means of diversification. And finally, bonds, like loans, have the risk of defaulting, though some bonds are inherently less risky than others.
20201016/DuckDuckGo how are bonds useful as an investment tool
20201016/https://www.investopedia.com/articles/bonds/09/top-uses-bonds-investments.asp
20201016/DuckDuckGo bonds and loans
20201016/https://www.wallstreetmojo.com/bond-vs-loan/