Last year corporate and government bonds indexes plunged with stock making people ask of what good bonds for. To answer that question let us explore some of the basics of bonds what they are and what makes them tick.
First and foremost, bonds in simpler terms are loans. When you buy a bond from a company or a government facility, it means that they are borrowing your money for a fixed time, promising to pay you regular interest and return the initial cash at the end of the agreed period.
However, in between the period the value of the bond can fluctuate.
Second, the interest rates depend on the fluctuations. Interest charges and bond rates usually sit at the ends of a swing. When interest rates upsurge the bond prices drop and vice versa.
Thirdly for long term government bonds, the main determinant factor for interest rates is future changes of fluctuation expectations. When everybody is expecting faster inflation, they will also need high-interest rates to offset it. Corporate bonds have more variables, and this includes the company’s growth prospects and creditworthiness. These factors will greatly determine the corporates ability to repay you later on.
Fourthly the ups and downs which stocks have can make the planning of cash flow to be challenging. Regardless growth remains vital to offset inflation and generate enough money for you in order not to run out of cash.
Hence having too many bonds become risky for people who have many future needs.