what exactly are bonds?

Question

which ones have the highest interest rate? when and why do interest rates change? is it because of inflation?

Answer 1

Short Version: a capital building tool for the company issuing them. They sell you a $100 5 year bond for $80, you receive a positive rate of return in that time frame, and the company believes they can outperform the interest due to you, within the 5 years, in earnings for the company using your money. The company takes on most of the risk, but the returns are minimal for you.

Answer 2

If you are speaking of Corporate Bonds, they have a fixed interest rate at the time they are issued. The rate does not fluctuate on those bonds. Any new bonds may have a lower or higher rate at issue date. Inflation and current interest rates will affect the bond interest.
Bonds are loans to corporations by the buyer of the bonds.
You need to speak to a broker in order to learn which bonds have the highest rate and if they are available on the market.
Bonds can lose or gain value on the current market.
They will pay par at maturity.
Beware of "junk bonds".

Answer 3

http://en.wikipedia.org/wiki/Bond_%28finance%29

good basic definition

interest rates change based on the expectations on the growth or decline in inflation. the federal reserve actually sets the short-term rate (30 day) long term bond rates are set by the market - supply and demand for bonds themselves.

U.S. treasury bonds are said to be "risk-free" basically because if the U.S. gov't defaults on its loans (bonds) then you've got a lot more to worry about than whether or not you'll get your money back. Because they are "risk-free" they will carry the lowest yield, because they have the highest probability of not defaulting. On the other hand, bonds which pay the highest yield are the riskiest bonds, or are denomenated in currencies of countries with a high rate of inflation - because as time goes on, the money you receive in interest is worth less and less each coupon payment. The probability of a default would be high, if a company, municipality, or country can't pay its debt load, or is perceived by the market as unable to service its debt load.

Right now - in the finance press - there's a lot of hype surrounding CDO's or collaterized debt obligations - these are basically your high risk mortgages on houses. Your bank or mortgage issuer basically pools together all these mortgages and issues bonds to get them off their books and collect fees associated with the offering. The trouble with these CDOs is that the coupon payment is backed by the ability of the borrower to pay off the debt essentially - the more defualts on mortgages, the fewer people are left to collectively pay the interest, and the value of the collateral declines. As deliquencies rise, participants don't expect to be paid, and are selling those CDO's causing their yield to rise.

Remember, yields move inversely to prices. As the price of a bond goes up, the less yield you will receive and vice versa.

Answer 4

Bonds are like checks you get and ten years later they are worth twice as much. for example: if you got a 'bond' that was worth $50 dollars ten years later it would be worth $100 dollars, there really cool!