Bond investment idea

[Loxense]

Bonds are a fixed income product that provides a means of long-term fundraising for various bodies and institutions. Although there are different types of bonds, all bonds work in the same basic way and can be a smart method of building passive income streams.

Bonds are a type of debt. In other words, it's a bond—a promise to pay—that the bond issuer makes to the bondholder under certain conditions. The issuer of the bonds assumes the debt, and the person who buys the debt, the bondholder, is the one who provides the money.

The bond issuer can then use that money to fund whatever spending plan it wants. In return, they pay fixed interest on the debt at regular intervals for the life of the bond (it's in these payments that you create passive income streams through bonds). At the end of the debt's term, the bond is said to be due, at which point the issuer pays the principal amount of the debt (known as principal).

There is a close relationship between interest rates and bonds. Because bonds pay a fixed amount periodically, they become more attractive when interest rates fall and less attractive when prices rise. Therefore, bond market prices may differ from the issue price and are often used as a proxy for medium- to long-term interest rate forecasts.

Of course, the price of a particular type of bond would also be affected if perceptions change about the creditworthiness of the issuer.

Before turning to bonds as one of your passive income investments, you should also consider the credit risks associated with them, such as inflation risks and interest rate risks, which can affect your investment and the resulting additional income.