What is a bond?

If you are not aware of what a bond is, you are not alone. With a minimum parcel size of $500k, it just wasn’t accessible for mums and dads. I thought I write this quick educational piece to explain what these defensive assets are without so much jargon.

In its simplest form bonds are an “I owe you” that can be traded in a market. Think of a loan between John and SuperBank, where John is lending money to SuperBank. Now say John needs his money back sooner than he thought but it is tied up with SuperBank. Mary can buy that loan off John so John has his money back and now Mary is essentially lending the money to SuperBank. The bond is that loan between all of them.

Here is a sweet bit about bonds, just like every other loan the borrower is legally obligated to pay the capital back at maturity plus some interest. So in the example above, SuperBank is obligated to pay back the loan to who owns the loan at maturity. So whether it be John or Mary who owns the loan will get their money back plus extra interest. This is what makes them a great investment.

Bonds work similarly to term deposits. You invest money today and you earn more money at a later date. Bonds are a way to capture the time value of money and a way for your money to work harder for your future.