6 - What are bonds?
[Speaker 1] And then he tells me “I have bonds too, you know”.
[Speaker 2] As in, a bond with someone else?
[Speaker 1] No, I don't think you're following me.
[Speaker 2] Okay, well, explain it to me. Or do you mean he has other ties and obligations, so the relationship isn't going to work out?
[Speaker 1] No, I'm talking about bonds as in debt securities! I manage a portfolio of bonds. You know about the bond market, right?
[Speaker 2] Um, I think so.
[Speaker 1] Okay. Bonds are essentially like shares, a type of investment vehicle. Except that while shares are parts of a company, bonds are part of a debt.
[Speaker 2] Parts of a debt?
[Speaker 1] Yes, parts of a debt. If a company or the government needs to raise money for a project or its activity, it will ask people to lend in money by buying its bonds at a given value and maturity. Investors will earn interest on the bonds and at maturity they will get back what they paid upfront.
[Speaker 2] In other words, if you lend me €10,000 over 5 years, I'll pay you interests over the 5 years and at the end I pay you back. So it's like a bank loan for an apartment or a car!
[Speaker 1] Exactly. The only difference is that instead of just one lender, all the bondholders are lending to the borrower. It's a way of sharing debt between lots of investors.
[Speaker 2] How can they be sure they'll get their money back at the end?
[Speaker 1] No investment is without risk. But there are rating agencies that give borrowers a score so that investors have an idea of how sound the bonds are. The higher the risk or the lower the borrower's score is, the more interest investors earn on their bonds and vice versa.
[Speaker 2] How long does a bond last?
[Speaker 1] It's like when you buy a car or an apartment. A bond can be over 2 or 20 years. You can even get bonds with a 30 or 50 year maturity.
[Speaker 2] Is the interest you earn fixed?
[Speaker 1] Or variable depending on the borrower's needs and the bank's recommendation.
[Speaker 2] But if the bank isn't doing the lending, what is it doing?
[Speaker 1] The bank advises the borrower throughout on the interest rates, for instance. And above all, it is the bank that finds the first investors. It is also the bank that issues the bonds to be traded by everyone on market.
[Speaker 2] Okay, I get it. It's kind of like an investment. So back to this guy, a good investment?
[Speaker 1] If only I knew where to start.
[Speaker 2] Well, I do.