The Value of Bonds in the World of Finance

Bonds provide a tool to finance growth projects for corporations and governments. At the same time, they allow individual investors to try their hand at lending, which is a very lucrative business. Typically, lending is reserved only to institutions with large reserves. A single individual cannot often provide the lump sum needed to fund a project. Through bonds, individuals have a chance at getting into the moderately low-risk lending market, which provides relatively predictable returns on investment.

Corporations Rely on Bonds

Corporations need large sums of cash not only to start operations but also to cover the ongoing cost of expansion. These corporations may not want to issue equity in their business, which is what they would have to do in order to sell stock. Taking large loans from banks is always an option, but a corporation will still see limits on those loans. Bonds provide the final financing piece, allowing them to take on a large debt through breaking it into small pieces. The risk to any one lender is significantly reduced. Since lenders charge rates based on risk, the corporation will often get a better interest rate as a result. The corporation will also get to set its own payment terms. Investors can choose either to accept these terms and purchase the bonds or seek other opportunities, but the corporation will not have to submit to the demand of one large, single lender.

Municipalities Rely on Bonds

Government organizations and municipalities are owned by the tax payer. They do not have the option of selling stocks. Instead, they must rely on loans and taxes alone to fund all of their operations. Tax payers will not unconditionally approve increases in taxes until a government body is completely funded. This means the body has only one other option: to go into debt to investors. They do this by issuing bonds. Before a government body issues a bond for a project, the voting constituency approves the debt. Then, the government body offers very low risk opportunities for tax payers and any individual investor to fund the projects. Bonds are integral in building infrastructure, paying for the military and promoting large government projects.

Individuals Benefit from Bonds

Individual investors need a mix of high- and low-risk opportunities to balance their portfolios. Large investors, like banks and lenders, are always looking to balance between high and low risk. This offers the best chance of good profits from high-risk opportunities and maintains stability through low-risk opportunities. Even the "safest" stock carries with it an inherent risk. A bond, however, can be purchased with relatively no risk at all. This is particularly true of government bonds since there is almost no chance the entity will go bankrupt. The federal government even goes a step further to offer bonds protected against inflation. The result is an opportunity for any investor to make a promised, albeit modest, profit by lending to the federal government. Investors benefit because they can participate in lending to huge projects they could not finance in full.

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