Get Your Money Back

Updated: May 10, 2021

What is fundamental difference between stocks and bonds? When you own the actual bond, you get your money back at maturity to the last dollar. Period.

Highlights:

  • Bonds offer investors more certainty than stocks or options.

  • When a bond matures, you get your money back.

  • This is the fundamental difference between owning individual bonds and buying bond funds.

 

Unique to bonds versus other security types is that, barring a default there is a known termination value upon maturity. This is called Par Value and it’s generally $1,000 per bond. Over the life of a bond, the price will change as borrowers demand either more or less interest for the perceived level of credit risk being extended. If the market is demanding higher rates, maybe the market price is $995, if the market needs less, maybe the price is $1,014. If you buy a bond for more or less than par value then you will either gain or lose the difference between the time you buy it and the time it matures. Once a bond matures the price reverts to the par value ($1,000) which is returned to the investor. In other words, You get your money back.


Each bond issue has terms that must be met by the issuer. Failure to meet these terms results in a default. While defaults are rare (0.3% for investment grade bonds, considerably higher for high-yield bonds), they do happen. But if it does, remember those bond fund managers? They lead a process called recovery from the issuer and you get to enjoy the fruits of their labors, instead of the other way around.


Because you get your money back at maturity, you can start thinking of bonds when you want to create goal-oriented portfolios, such as saving for a down-payment, your child's college tuition, or a dream wedding. With individual bonds, you can take comfort that you don't have to worry about where the stock market is when you want to buy your first home. Knowing you are going to get your money back should make you feel safe and sound.


Winner, winner chicken dinner; welcome to saver-town!


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