Back to School: Bonds 101

Guest host Tyler Cowan asks Ian Tam about bonds!

Ruth Saldanha 3 September, 2020 | 2:32AM

 

 

Tyler Cowan: Hello, I'm Tyler Cowan. And today, I'm going to talk to Ian Tam about bonds. Hi, Ian.

Ian Tam: Hi, Tyler.

Cowan: What is a bond?

Tam: What a great question, Tyler. So, a bond is basically like an IOU. So, say, you needed to borrow some money from somebody, an IOU is basically saying that at some point in the future you're going to pay back that full amount of money to whoever borrowed it. So, that's basically what a bond is. It's a promise to pay you back whatever money you lent to someone at some point in the future.

Cowan: Okay. Why do companies issue bonds?

Tam: Yeah, another great question. So, companies will typically issue a bond because they need the money to do something. So, maybe they need to buy some new equipment for their store, maybe they need to buy a new property. Basically, they don't have the money available today. So, what they are going to do is issue a bond or an IOU to get that money so they can use it right away with a promise that they are going to pay that back at some point in the future.

Cowan: Okay. Can only companies issue bonds?

Tam: No, Tyler. Actually, different types of places can issue bonds. So, for example, the City of Toronto can issue bonds. Same as the whole province of Ontario, so there's provincial bonds. And even the Government of Canada, so the country, can actually issue a bond if they need money.

Cowan: Okay. Why is it good to invest in bonds?

Tam: Yeah. So, bonds are a good investment because they are a lot safer than other types of investments like stocks. Because it's basically an IOU, you are basically guaranteed to get that money back at some point in the future. Now, there's different types of bonds. Some are very short term. So, you can get like a three-month bond or even a one-month bond, so not a very long time. But sometimes it will be very long tenured bonds like 10 years. So, a company can promise to pay you that money back in 10 years from now. But the point is, these bonds are very safe because the company has to pay you back at the end of that time period. And that's they are very good investments because they don't move as quickly as other types of investments like stocks.

Cowan: Okay. Thank you, Ian. For Morningstar, I'm Tyler Cowan

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Ruth Saldanha

Ruth Saldanha  Ruth Saldanha is Senior Editor at Morningstar.ca

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