Bonds are a type of security and they are also an investment tool. This is an investment tool that helps the government or corporations make money and also help the investor to earn a fixed amount of return depending on the number of bonds purchased. The bonds actually work on a simple principle of fixed simple or compound interest that is paid to the investor for a set period or a fixed period of time depending on the need of the government or the corporate. Since these are used as investment tools, every investor should know as to how do bonds work for them to be able to analyze the risks and rewards of investing in this tool.
Bonds are issued by the government usually the federal government. It can also be issued by various state Governments and even the municipalities. These bonds are issued so that the public will purchase them as an instrument of saving. This will also benefit the government because when the bonds are purchased by people, the government gets the revenue that it needs to finish various developmental projects. Even the deficit in the budget if present is usually filled by issuing bonds to investors.
In fact, there are some bonds issued by the government for completion of specific projects. The bonds issued are for a specific period of time like 5 years or even 10 years or more. This yields a fixed return on the investment for the investors when they purchase each bond at the price that is fixed for that particular bond by the government.
When the bond reaches the maturity period or the end of the term of the bond, the issuer of the bond, which can be the government or the corporate, returns the amount to the investor along with the interest earned. This is one of the safest methods of investment available. This is also a low return yielding instrument. Usually the returns earned by the people who invest in bonds are about only less than 5 percent.
In spite of the low income to the investor, this is one of the much sought after investments because of the safety of the money. The investors flock to government issued bonds whenever the stock markets are on a bullish run. This is because the investor needs protection for their hard earned money. This is the system on which the bonds work.