Now debt is interesting. There's a lot of ways you can raise debt, and actually there's a lot of ways you could raise equity, it actually doesn't have to be with selling. Well, for the most part you are selling stock. You could maybe think of some other way, and we'll talk about other forms of equity, preferred stock and all of that.
But in the simplest level, you're really always selling stock. Debt's a little different. Debt could be just in the form of a bank loan.
And you have to pay back the money, above and beyond the interest, over this time schedule. So it's not too different than maybe a mortgage. Or they might say OK, you pay the interest for five years, and at the end of the five years you also have to pay the principal amount.
Or you maybe have to come up with a new loan or something like that. So that would just be a bank loan. There's other things that are revolving lines of credit, which is kind of like a company's credit card to some degree, that it doesn't have to use it. But if it does, that's kind of debt the company takes on. But kind of the one that people always talk about, I guess in the same phrase, is bonds.
So bonds are-- essentially you are borrowing from the public markets again. You are borrowing from a bunch of people. And it could be divided into-- you could divide this into 6, bond certificates. So this could be 6, bond certificates-- let me see, and six million divided by 6,, that's a thousand, right?
And let's visualize what a bond certificate could look like. So that could be a bond certificate. And its face value, and sometimes they'll call it the par value, or the stated value. It'll say-- let's call it bond from Company XYZ. And that future date is at maturity. And you say oh, well, Sal, that's all good, but what about the interest in between? And there's two ways to think about this. So, if you think about it, there's automatically interest accruing in that. They're paying me more back than I gave to them.
And in future videos we'll actually do the math of how to figure out that type of interest. In that situation, where they're not kind of paying me interest as they go, this would be viewed as a zero coupon bond. And I know I'm throwing out a lot of terminology, but it'll all make sense to you to in a second.
So zero coupon essentially means they're not paying interest until they pay off the whole loan. And then they might kind of-- the interest will be implicit in the whole value amount. And I kind of jumped the gun a little bit. But coupon is essentially a regular payment on the bond that the company makes, in this case XYZ will make, that is essentially-- you can almost view it as a kind of interest.
But if you really had to figure out the interest that you're getting on the bond, you'd actually have to figure-- and I'll do maybe a whole playlist on bond mathematics-- you would have to figure out-- It's based on the coupon, what you gave them, and then what they're going to pay you, and when they're going to do it.
So just as the big picture, both of these things are traded. This is a stock, it's traded on exchange. You're probably familiar that. If you go to Yahoo! To compensate for these risks, emerging market bonds generally offer higher yields. Bonds and stocks can work well together, as part of a well-diversified portfolio. That is because they tend to have low correlations with each other, meaning they respond differently to changes in the economic cycle.
An exception to this is the global financial crisis when correlations between the two were higher. If an economy is shrinking during a recession, interest rates are often cut, which tends to mean higher bond prices and lower yields.
This is a particularly good environment to invest in bonds. But in a recession, lower economic activity means consumers tighten their belts, and spend less on goods and services. A well-chosen portfolio of both bonds and shares should stand an investor in good stead throughout the economic cycle.
Of course, the two asset classes provide different benefits — bonds deliver a regular income, while shares offer the potential for capital growth. Before investing in either bonds or shares, it is important to ascertain your tolerance of risk. Do not invest what you cannot afford to lose, and it is a good idea to consult a professional financial adviser for guidance. That means the effect of a default in a bond fund or share price fall in an equity fund is minimised. If you would like to learn more, keep exploring our other fixed income articles, videos and infographics below.
Explore our solutions. This publication is for information and general circulation only. It does not have regard to the specific investment objectives, financial situation and particular needs of any specific person who may receive it.
You should seek advice from a financial adviser. Past performance and any forecasts on the economy, stock or bond market, or economic trends are not necessarily indicative of the future performance. Views expressed are subject to change, and cannot be construed as advice or recommendations. References to specific securities if any are included for the purposes of illustration only. This publication has not been reviewed by the Monetary Authority of Singapore.
The difference between stocks and bonds explained. Technically speaking, though, these ETFs are financial assets, while the actual gold or silver bullion they own is the real asset. Another example are real estate investment trusts REITs , which invest in real estate properties, ranging from residential to commercial developments.
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A financial asset is a liquid asset that gets its value from a contractual right or ownership claim. Real assets are physical assets that have an intrinsic worth due to their substance and properties such as precious metals, commodities, real estate, land, equipment, and natural resources.
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