What Is A Bond?

What is a bond? Really a bond is a IOU. Governments have bonds that they issue. All levels of governments have bonds to included Federal, State and Municipal. Also known as Federal Bonds, State Bonds, and Municipal Bonds. When you invest in a bond you are purchasing shares. In return for your investment the investor agrees to pay you an interest rate (rate of return) at a future date.

Bonds have been around for years. In the past we had war bonds. However, bonds have become a little more complicated. Bonds now have ratings ranging from junk bonds to triple “A” bonds. The ratings system work like this — the higher the grade or rating, the lower the interest. Here’s why. Bonds with higher grade have less risk. Therefore, interest rates on high grade bonds pay less interest. On the other hand, bonds with lower ratings, like junk bonds pay a higher rate of return (higher interest rate).

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