Every day our relationship managers speak to hundreds of people, all with varying degrees of investing experience. One question that comes up regularly is: ‘what exactly is a bond?’
Etymologically, the word ‘bond’ dates from the 1590s, coming from the word ‘bind’ and the concept of ‘binding one to pay another’. ‘Bond’ is now a word with multiple definitions, but the meaning most pertinent to our business is “an agreement with legal force, in particular a promise, guarantee or assurance”.
More specifically, bonds are simply I.O.U.s paying a fixed rate of interest on a loan from you, the investor, to a company or government – they are what is known as a ‘debt instrument’. Once a bond has been purchased, the bond issuer owes the bondholder a debt, which includes both interest payments and a promise of future repayment of the principal (your invested capital) on a pre-determined maturity date at the end of the investment term. Please however be aware that your capital is at risk and returns are not guaranteed, rather they are dependent on the success of the company or project you have invested into.
The earliest example of a bond dates back to circa 2400BC in ancient Mesopotamia (present-day Iraq) – a tablet guaranteeing the regular payment of corn in return for a loan. This practice developed into a fully-functioning bond market in the ancient city of Ur, and remarkably a number of the clay tablets upon which contracts were inscribed remain intact. One tablet from 1796BC describes an annual rate of 3.8% over 5 years on a loan of 500 grams of silver – a better rate of return than you will find in most places today!
The global fixed-income market now exceeds $100 trillion, but despite the huge size of the market, fundamentally bonds remain simply a contract between two parties. When we think of bonds, we often think of government bonds, which come in various guises, but are known as “gilts” in Britain and “treasuries” in the United States. Governments use these bonds to finance various projects, from defence to infrastructure. ‘Corporate bonds’ are very similar in purpose and structure, though the issuers are from the private sector – either new companies looking to raise start-up capital, or more established companies planning to develop their existing operations or expand into new areas.
Bonds are a popular investment choice as they can provide investors’ portfolios with fixed rates of returns, although please be aware these returns are not guaranteed. Enquire today and find out how our bonds enable investors to fund a variety of exciting green projects and – as in ancient Mesopotamia – have the potential to offer you better rates of returns.
*Please note that Amio Wealth is not regulated to give investment advice, so if you are unsure about anything please seek advice from a regulated advisor. By investing, your capital is at risk and returns are not guaranteed. Security measures should not be taken as a guarantee of repayment. Please click here to view our full disclaimer.