I am not saying I want the attention of a cult, but I am saying that it would be nice to have that sense of community.
(Don’t concern yourselves – I have watched and been traumatized by both Ari Aster’s film Midsommar and the Vancouver based horror-show that was NXIVM and its documentary. A single image of Keith Raniere could convince anyone to push the big red button and eradicate humanity. I do not have the chutzpah to join a cult).
I do, however, appreciate the finality of it all. If you are not with it, you are dead. That sort of drama is entirely unprecedented, unwarranted, and honestly for lack of a better word, brilliant. It reminds me of myself in 2003 when I didn’t want to finish my Spanish homework and my parents told me I had to. I packed my piggy bank and granola bar in a backpack and made it 3 blocks up my street before my mother found me and lured me home with the promise of hot chocolate.
Does any of this have a point? Not really. I just wanted to flesh out my thoughts on cults once I realized they could be controversial. If there is a cult that is the antithesis to scientology and doesn’t have a predatory white male as its leader (this may be an oxymoron), would I get dinner with them? Absolutely.
In any case I am here to talk about bonds, not the blood type.
As it turns out, financial bonds are everything a cult isn’t. I really thought I’d be able to find a clever through line with this – the language presented such promise. (I’ve got nothing).
Bonds, in the financial verse, are generally safe, quite mundane, and not at all religious. They are, however, a quintessential type of investment and something you should really know about if you want to be someone who knows about things.
Learning about bonds is the equivalent of picking up toilet paper at the grocery store – unexciting, feels like something that should be free, but is a necessity nonetheless. Here goes.
What is a bond?
You may remember the minor existential crisis that has been in your inbox the past 3 weeks. I wrote a 3-part letter to my sister about why we can’t just print more money. Amid the ramblings I mentioned treasury bonds, which I manically defined as:
A fixed-rate government debt security issued by the federal government.
In human words: you buy up the government’s debt to help them out and later you get your money back, plus interest…
Bonds tend to pay interest payments over time (like a dividend!!).
Is this exciting any of you yet!!!
To no one’s surprise, I found a far better definition on the internet:
“A bond is a kind of loan you make to the government or a company. They use the money to run their operations. In turn, you get back a set amount of interest once or twice a year. If you hold bonds until the maturity date, you will get all your money back as well. If you sell early and bond prices are up, you will make money. If prices are down, you will lose money.”
To reiterate:
When you buy a bond, you’re lending your money to a company or government (the bond issuer) for a set period of time (the term).
The term can be anywhere from 1-year or less to as long as 30-years.
In return, the bond issuer pays you interest.
On the date the bond becomes due (the maturity date), the issuer is supposed to pay back the face value of the bond to you in full.
2 ways to make money on bonds:
1. Interest payments
I already went over this but for anyone who hasn’t had their coffee yet…
Bonds pay interest. Most have something called a “fixed interest rate” which means exactly what it sounds like it means (the interest rate does not change, it is fixed).
Some bonds have something called “floating rates” which, again, means exactly what it sounds like it means (the interest rate fluctuates over time). On the bond’s maturity date, you’ll get back the face value.
I apologize if any of this is triggering for my fellow student loan carriers. For the charmed ones who don’t understand that reference – we too had to choose if we wanted a fixed or floating interest rate on our loans. Sophie’s choice, if you will.
Example for the 1 person reading this who enjoys numbers:
You just bought a 10-year Government of Canada bond for $5,000. (Painfully untrendy but I guess you’re being responsible or what not). The bond pays a fixed interest rate of 4% a year. (Probably a little better than your savings account?) If you hold the bond until it matures:
- You’ll get back $5,000.
• You’ll get back 4% in interest (i.e. $200, a year. And no, I obviously didn’t do that in my head).
• Your return will be about $2,000 over 10 years ($200 x 10).
2. Selling a bond for more than you paid
This to me is a bit weird. If you want to f*ck around with buying and selling based on the market trends, I’d suggest you turn to stocks. The appeal of bonds, from what I’ve gathered, is that they’re like your grandmother – safe, sweet, and unlikely to spontaneously get a buzz cut and face tattoo. In other words, you can count on them.
On the other hand, (for the most part), I do not know what I am talking about. So do whatever blows your hair back. I am sure there is a basement dweller somewhere who has made a fortune doing this and would vehemently disagree with my sentiment.
In general, when interest rates go down, bond prices go up. If this happens, you can make money by selling your bond before it matures. You’ll get more than you paid for it, and you’ll keep the interest you’ve made up until the time you sell it.
For example:
You own a bond paying 3% interest. When interest rates are low – say 1% – your interest rate is higher than the going rate. This makes your bond attractive to other investors. In turn, if interest rates rise to 5%, your bond is less attractive.
Disclaimer:
Bonds can lose money too. As aforementioned, you lose money on a bond if you sell it for less than you originally paid (common sense). You could also lose money if the issuer defaults on their payments. I wrote about the nightmare of defaulting last week. To be fair, this is uncommon, and I still think my grandmother metaphor stands up.
Until next week.