Stock Market Game Week in Review

Let's start with the basics: What are bonds?

They are loans you and other investors make to bond issuers in return for the promise of being paid interest, usually but not always at a fixed rate, over the loan term. The issuer also promises to repay the loan principal at maturity, on time and in full. Bonds have a reputation as a dull investment, in part because they are less volatile than stocks and produce a lower long-term return than stocks. But in the current economy, they have become much more attractive as an investment option.

While all bonds share basic characteristics such as terms, rates, and par values (the face value, or named value of the bond -- usually $1,000), they are not all alike.

One of the major differences is that they're issued, or sold, by four distinct entities in the U.S. Corporations issue bonds to raise money for expansion, research and development, and other expenses of doing business. While corporations can also raise money by selling new stocks, they may prefer bonds because the value of their outstanding common shares declines when new shares are issued. Municipal governments, such as states and cities, sell bonds to fund projects for the public good like building bridges, sewers, roads and schools. The U.S. Treasury issues bonds to meet its regular and unusual obligations. Lastly, government agencies issue bonds to raise money to do their work, such as providing mortgages and student loans.

As a general rule, bonds can help you weather downturns in the stock market, not only because they tend to fluctuate less in price than stocks, but also because they have the potential to provide regular income and strong total returns in periods when stocks are struggling. It seems like it's the perfect environment to start taking a closer look at bonds.

For more information about bonds, check out our What is a Bond? lesson in the Teacher Support Center. To access the lesson, click "Lessons & Activities" (in purple), search by keyword "Bonds," and make sure to select "No" after "Core."

To learn more about The Stock Market Game, visit www.stockmarketgame.org.