Author Topic: Naive questions about how bonds work  (Read 1473 times)

drio

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Naive questions about how bonds work
« on: March 06, 2017, 07:28:15 AM »
Hi there,

I read this about bonds in the BH book:

"“you’re actually lending a specific amount of your money to the bond issuer.
In return for lending your money to the issuer, you’re promised a return on your
investment that is the bond’s yield to maturity and the return of the face value of
the bond at a specified future date, known as the maturity date. These maturity
dates can be short-term (1 year or less), intermediate-term (2 to 10 years), and
long-term (10 or more years). So, in reality, a bond is nothing more than an IOU
or promissory note that pays interest from time to time (usually semiannually) until maturity.”

I am trying to understand the differences between an index fund for stocks and bonds (VBMFX).
When you buy from an index fund, you are buying shares from the different companies included
in the index fund, and you hold those shares for as long as you want.

When you buy bonds (from an index), those bonds will reach maturity at some point, so they won't
yield any more returns (?). Does that mean that you have to keep reinvesting them periodically?
It doesn't seem that's the case. When I look at the different investment online tools, it seems you
just buy bonds the same way you buy shares from an index fund.

I was hoping someone could clarify that for me.

Thank you,
-drd




bobechs

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Re: Naive questions about how bonds work
« Reply #1 on: March 06, 2017, 08:17:27 AM »
Bond fund =/= one single big bond.

The fund buys, sells and cashes out bonds over time, so you don't have to. 

You don't have to tip them; it's what they do.