Changes

As recently as fifty years ago, bonds were issued in the form of paper certificates, which included a coupon for each interest payment. The bondholder actually needed to clip off each coupon with scissors and mail it to the bond issuer in order to receive each interest payment. For retirees fortunate enough to be living on the interest from bonds, clipping coupons was a regular and time-consuming task.

As recently as fifty years ago, bonds were issued in the form of paper certificates, which included a coupon for each interest payment. The bondholder actually needed to clip off each coupon with scissors and mail it to the bond issuer in order to receive each interest payment. For retirees fortunate enough to be living on the interest from bonds, clipping coupons was a regular and time-consuming task.

Bonds are one of the three main asset categories, the other two being stocks and cash. Compared to stocks, bonds offer less risk and less possibility of large reward. A stockholder participates in the ups and downs of the business. When business is good the market price of a stock climbs; sometimes it skyrockets. When it is bad, it falls; sometimes, to a fraction of its former value. A stockholder who buys a stock, planning to sell it exactly five years in the future, can only guess as to how many dollars he will make or lose. A bondholder, in the example above, knows that if he holds the bond to maturity, he will have made exactly $300, and knows the exact day on which every payment will be paid and its exact amount... unless the issuer of the bond fails to keep the promise (''defaults'') on the loan.

Bonds are one of the three main asset categories, the other two being stocks and cash. Compared to stocks, bonds offer less risk, but also less possibility of a large reward. A stockholder participates in the ups and downs of the business. When business is good the market price of a stock climbs; sometimes it skyrockets. When it is bad, it falls; sometimes, to a fraction of its former value. A stockholder who buys a stock, planning to sell it exactly five years in the future, can only guess as to how many dollars he will make or lose. A bondholder, in the example above, knows that if he holds the bond to maturity, he will have made exactly $300, and knows the exact day on which every payment will be paid and its exact amount... unless the issuer of the bond fails to keep the promise (''defaults'') on the loan.

Bonds represent debts which the issuer owes and must pay... unless the company is in such bad shape that it cannot meet its debts, usually meaning it is in bankruptcy. In the U. S., two big firms research the financial condition of bond issuers, grading bonds with A's, B's, and C's, almost like school grades. Personal investors usually buy "investment grade bonds." The grading companies judge that a default on these bonds is ''extremely'' unlikely.<ref>The firms are Moody's and Standard and Poor's. Each company has a rather complicated grading system. Moody's uses Aaa, Aa, A, Baa, Ba, B, Caa, Ca, and C; S&P's equivalents are AAA, AA, A, BBB, BB, B, CCC, CC, C and adds D for bonds that are actually in default. Grades of Baa/BBB or better are considered "investment grade."</ref>  

Bonds represent debts which the issuer owes and must pay... unless the company is in such bad shape that it cannot meet its debts, usually meaning it is in bankruptcy. In the U. S., two big firms research the financial condition of bond issuers, grading bonds with A's, B's, and C's, almost like school grades. Personal investors usually buy "investment grade bonds." The grading companies judge that a default on these bonds is ''extremely'' unlikely.<ref>The firms are Moody's and Standard and Poor's. Each company has a rather complicated grading system. Moody's uses Aaa, Aa, A, Baa, Ba, B, Caa, Ca, and C; S&P's equivalents are AAA, AA, A, BBB, BB, B, CCC, CC, C and adds D for bonds that are actually in default. Grades of Baa/BBB or better are considered "investment grade."</ref>