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10 Key Terms Every Kid Should Know About Bonds

Updated: Dec 3, 2023

Hey there, parents! Today, we're diving into a topic that's super important for your kids' financial future: bonds. You might be thinking, "Bonds? Isn't that a bit complex for kids?" Not at all! As an educator focused on teaching kids finance, I'm here to break it down. Teaching kids about bonds early on can set them up for a lifetime of smart financial decisions. So, let's get started!


If you're interested, we have a similar article for stocks titled "12 Common Stock Market Terms Explained for Kids!"

 

Table of Contents

 


kids playing with bond building blocks


1. What are Bonds?


Understanding the Basics

Bonds are like IOUs issued by governments or companies. When you buy a bond, you're lending money to the issuer, who promises to pay you back later with some interest. It's a way for these entities to raise money for various projects or expenses.


  • Simple Explanation: Think of a bond as a loan you give to a company or government.

  • Why It's Important: Bonds are a fundamental part of the financial world, offering a way to earn money through interest.

Bonds in Everyday Life

Bonds aren't just for big investors; they're everywhere! From funding schools to building bridges, bonds play a crucial role in our communities.


Check out our article "Making Bonds Simple for Kids: Your Guide to Explaining Government and Corporate Bonds" for a deeper dive into this subject!



2. Interest on Bonds


How Interest Works

Interest is the extra money you earn on top of the original amount (principal) of the bond. It's like a thank-you gift for lending your money.


  • Key Point: Interest is the profit you make from bonds.

  • Calculation Tip: To estimate the interest, multiply the bond's rate by its principal amount.

Interest in Action

For kids, understanding interest is like knowing why a lemonade stand can be profitable. It’s not just about getting back what you invest; it’s about the extra you earn!




3. Maturity Date


The Countdown to Payback

The maturity date of a bond is when the issuer promises to pay back the money you lent them. It's like setting a due date for a school project – it tells you when you can expect your money back.


  • Remember: Maturity date = Payback time.

  • Real-World Example: A 10-year bond bought today will mature in 2033.


Why Maturity Dates Matter

Choosing bonds with different maturity dates can be a smart move, just like having a mix of short-term and long-term goals in life.




dad and son holding a bond

4. Face Value of Bonds


The Original Price Tag

The face value is the initial price of the bond. It’s the amount you’ll get back once the bond matures, not counting the interest.


  • Point to Note: Face value is what you’re promised back at the end.

  • Impact: The difference between the purchase price and the face value can affect your earnings.

Face Value in Everyday Terms

Think of the face value as the price marked on a toy. It’s what it’s worth at the start and what it’ll revert to in the end.




5. Yield: The Earnings Measure


Calculating Your Gains

Yield is a way to measure how much you can make from a bond. It takes into account the interest rate, face value, price, and time until maturity.


  • Essential Understanding: Yield tells you how good of a deal your bond is.

  • Calculation Basics: Higher yield often means more earnings, but also more risk.


Yield in Kid Terms

Yield is like the score in a video game - it helps you compare and choose the best bonds, just like you'd choose the best game strategy.




6. Credit Rating: The Trust Factor


Gauging the Safety

A bond's credit rating shows how likely it is that the issuer will pay back the money. Higher ratings mean lower risk.


  • Important to Know: Good credit rating = Safer bond.

  • Influence on Decisions: Just like a report card, a better credit rating can make a bond more appealing.

Credit Rating in Kid Language

It’s like choosing teammates in a game - you want someone reliable, right? That's what a good credit rating signifies.




a treasure map of investing

7. Market Price: Bonds on the Move


Bonds in the Marketplace

The market price of a bond can change over time, based on interest rates, credit ratings, and other factors. It's the current price if you were to buy or sell the bond now.


  • Key Concept: Market price can be different from face value.

  • Fluctuations: Think of it as a price tag that changes with demand, like how popular toys might get more expensive around holidays.

Understanding Market Price

The market price is like the ongoing "buzz" about a bond. It tells you what people currently think it's worth.




8. Coupon Rate: The Interest Indicator


The Regular Earnings

The coupon rate of a bond is the interest rate it pays. It’s usually fixed, meaning it doesn’t change over the life of the bond.


  • Simple Definition: Coupon rate = Interest rate of the bond.

  • Relevance: It helps determine how much money you'll make regularly.

Coupon Rate for Kids

Imagine you have a candy subscription box. The coupon rate is like knowing how many candies you’ll get in each box.





9. Principal: Your Investment


The Core of Your Investment

The principal is the amount of money you initially invest in the bond. It's the base amount on which interest is calculated.


  • Basic Understanding: Principal = Your initial bond investment.

  • Role in Returns: It’s like the seed you plant to grow a money tree.

Principal in Simple Terms

Think of the principal like the cost of a board game. It's the starting amount you pay to eventually play and win more.




10. Diversification: Spreading the Risk


Mixing It Up for Safety

Diversification means spreading your investments across different types of bonds (and other assets) to reduce risk.


  • Key Strategy: Don’t put all your eggs in one basket.

  • Application to Bonds: Investing in various bonds can balance risk and reward.

Diversification Explained

It’s like playing different games to have fun in different ways. Diversification in bonds is about not relying on just one type for your earnings.




Conclusion

And there you have it! These are the ten key terms every kid should know about bonds. By understanding these concepts, your children can start on the path to financial literacy and success. Remember, it's never too early to start teaching kids about bonds and how they work.


If you want a hands on approach to teaching Bonds, check out our article "5 Fun At-Home Games that Teach Kids About Bonds!"



 

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