Expert: Paul Henneman - 8/12/2008

Question
i really dont mean to sound stupid, but what are bonds all about? how do they work and what is involved? im really interested but new to all this. thank you

Answer
Kayleigh,
   Thank you for your question! Don't worry, no such thing as a stupid question on this site. We are here to help at any level.
   To answer your question, I thought that I would quote Barron's Dictionary of Finance and Investment Terms, page 59:

"any interest bearing or discounted government or corporate security that obligates the issuer to pay the bondholder a specified sum of money, usually at specific intervals, and to repay the principal amount of the loan at maturity. Bondholders have an IOU from the issuer, but no  corporate ownership privileges,  as stockholders do".

There are several main points above that are important.
*Bonds are used by local or national governments, as well as corporations to raise money.
*The issuer (the government or corporation) essentially sells the bonds to investors. The investor is promised some sort of return, and the issuer gets the cost of the bond up front. Then has to repay that amount, plus interest, to the investor.
*Bonds are often used as safe investments. The return to the investor is set, it does not fluctuate like a stock price. But, the returns are often a bit lower than a stock could offer, due to the lower amount of risk. Many find this lower risk attractive.
*There still is some risk. If the corporation or government cannot repay the bonds, there can be default. Bonds are rated to give an indication of how secure they are.

Here is a link to another brief but decent summary of bonds, on wikipedia:
http://en.wikipedia.org/wiki/Bond_(finance)

I hope that this helps! Please do not hesitate to follow up with me if I can be of any additional service,

Best Regards,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com