Bonds & Corporate FD

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What Is a Bond?

A bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations. Owners of bonds are debtholders, or creditors, of the issuer.
Bond details include the end date when the principal of the loan is due to be paid to the bond owner and usually include the terms for variable or fixed interest payments made by the borrower.

Key Takeaways

  • Bonds are units of corporate debt issued by companies and securitized as tradable assets.
  • A bond is referred to as a fixed-income instrument since bonds traditionally paid a fixed interest rate (coupon) to debtholders. Variable or floating interest rates are also now quite common.
  • Bond prices are inversely correlated with interest rates: when rates go up, bond prices fall and vice-versa.
  • Bonds have maturity dates at which point the principal amount must be paid back in full or risk default.

What Is a Fixed Deposit?

A Fixed deposit is a fixed-term investment that includes the deposit of money into an account at a financial institution. Term deposit investments usually carry short-term maturities ranging from one month to a few years and will have varying levels of required minimum deposits.
The investor must understand when buying a term deposit that they can withdraw their funds only after the term ends. In some cases, the account holder may allow the investor early termination—or withdrawal—if they give several days notification. Also, there will be a penalty assessed for early termination.

Advantage of Fixed Deposit

  • Term deposits offer a fixed rate of interest over the life of the investment.
  • Term deposits are risk-free, safe investments since they're either backed by the FDIC or the NCUA.
  • Various maturities allow investors to stagger end-dates to create an investment ladder.
  • Term deposits have a low minimum deposit amount.
  • Term deposits pay higher rates for larger initial deposit amounts.
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