the Wealthy Canadian

There is so much talk about stocks and how to make money in the stock market that we tend to forget the entire bond market. So, I am presenting a four part series on bonds.

First of, what is a bond? A bond is a debt instrument that is secured by some asset(s). A common example of a bond is a mortgage. When you get a mortgage from your bank you are getting a loan that is secured by the house. If you stop making your promised payments then the bank can take the asset (your house). There are many types of bonds, issued by a variety of parties from all levels of government and corporations, long and short term durations, with a variety of features.

Most people have heard of bonds, but not many have heard of debentures. A debenture is similar to a bond in that it is a debt instrument, however it lacks an asset to secure the debt. In other words a debenture is a lot like a loan to your cousin Jimmy simple because you think ‘he’s good for it.’

Well, how do we know some organization is good for it? Unfortunately, we don’t.  However a few companies give credit ratings the the borrowing organizations.  Generally, the worse the credit rating the higher, the higher the risk of default, the cost of borrowing.

Next time we’ll look at coupons… oh boy, I love coupons.