Discussion

How do bonds work as an investment, and what are the key factors that influence their value?

If I understand correctly, when you buy a bond, you are essentially lending money to the government. In return, the government promises to pay you back the principal amount plus accumulated interest. While holding the bond, you earn interest annually. When you sell the bond, you would get your initial investment back along with the accumulated interest. It's similar to a CD in that you can't really lose the principal. Is that right? If so, what doesn’t make sense is: what happens when bond rates are negative?

A bond is essentially a loan you provide to an entity, such as a corporation or government. In return, the entity agrees to pay you a fixed interest rate annually for a set number of years. At the end of this period, you'll receive the bond's face value – the amount you originally paid for it. The paper bond represents this agreement and serves as the negotiable instrument for the transaction.