[xzins]

I’m not up on this stuff. Can you explain how bonds work? (I’m serious.)

[wmfights]

Can you explain how bonds work?

Think of them as mortgages. You buy a bond for a fixed price. Businesses guarantee an annual, or semi annual, payment during the life of the bond and at the end the principal is repaid in return for the bond.

Bonds used to be conservative investments that offered a better return than C/D's and money mkts, but had some risk because they were offered by private businesses and are not insured. Ratings agencies would offer a rating on the bond. The higher the rating the less risk and lower the yield (interest).

[P-Marlowe]

They are just an instrument in which a corporation will finance their operations. If they need $100,000,000 worth of equipment they can go to the bank and borrow it and pay exhorbitant interest rates, or they can sell $100,000,000 worth of bonds at much lower rates. The interest payout on bonds is usually much lower than what the banks would charge, but the secured bondholders would have a first lien on the company assets if the company can't pay back their obligations.

In this case the bondholders were moved to the bottom of the lienholders "list" so the company that was taking over Chrysler does not have to make the bondholders whole. In this case unsecured creditors were given priority.

Bonds are supposed to be a "safe" investment with a low return. That made them attractive to retirees, because they could always count on the money being there no matter what happened to the economy. Like "money in the bank".

Not anymore.