Compare owning part of a company via a share with a company's debt via a bond.
A bond is a security that represents a commitment by the issuer toward the holder.
The issuer can be a government or a company. The terms set the payments and the repayment. There is a risk the issuer will not meet its obligations, and the bond's market price can also change. With a fixed-rate bond, a rise in market interest rates tends to lower the price.
Selling a bond before maturity can yield a different amount than what was paid when buying it.
Compare owning part of a company via a share with a company's debt via a bond.
A fictional bond has principal of 1,000 and an annual coupon of 40. Dividing 40 by 1,000 gives 4%, but a buyer paying another market price does not necessarily earn a 4% yield. Purchase price, payment dates, maturity and the issuer’s ability to pay also matter. Coupon, yield and market price are different concepts. This example does not guarantee that every promised payment will be received.
Concepts that help you compare
Loan: the money now, the repayment later
A loan is money you receive with an obligation to repay according to agreed terms. The principal is the amount borrowed. Interest is part of the cost of credit, and there can be additional fees. Check the total repayments, the loan period, the type of interest and indexation. A smaller monthly payment is not necessarily a cheaper loan.
Comparison example: For illustration only: a loan of 1,000 ₪ for one year at a simple interest rate of 10%, with the entire repayment at the end of the year, requires 1,100 ₪ before additional costs.
Risk is the possibility that the outcome will be different from expected, including loss. Investments with higher potential returns often carry higher risk. Money held without change in the number of shekels is also exposed to erosion of purchasing power. It is important to understand when you will need the money and how much uncertainty you can bear.
Comparison example: Money for a trip in a week serves a different purpose than money for a distant goal.