We explain how money works through a 1-minute video and text. Today’s topic is ‘What are bonds?’
A bond is a certificate proving that you have lent money
When a country or a company borrows money, they issue ‘bonds.’ Buying a bond is equivalent to lending money to that country or company.
– Bonds issued by a country are called ‘government bonds’
– Bonds issued by a company are called ‘corporate bonds’
In the video, we showed how if you give 10,000 yen to a model of a government building, you receive a ‘government bond’ certificate. (Nowadays, these are not paper certificates but are managed in financial institution accounts.)
You receive interest while lending, and the money is returned at maturity
With government bonds, you receive interest every six months while the money is lent. When the set date (maturity) arrives, the money you lent is returned to you.
Key points of government bonds for individuals (from the Ministry of Finance website):
Item | Details
Minimum amount | From 10,000 yen (in 10,000 yen increments)
Interest | Every six months (twice a year)
Types | 10-year floating, 5-year fixed, 3-year fixed
Minimum interest rate | 0.05% per year
At maturity | The principal (the money lent) is returned in full
The interest rate is determined based on market interest rates. The fixed-rate type does not change until maturity, while the floating-rate type is reviewed every six months.
Caution when cashing in early
– You can only cash in early after one year has passed since issuance
– When cashing in early, the interest for the two most recent periods (after tax) will be deducted
Corporate bonds depend on the company.
The safety of a company’s corporate bonds changes based on that company’s creditworthiness. If the company goes bankrupt, the money you lent might not be returned.
Today’s key points
Stocks are ‘tickets to become a company owner,’ while bonds are ‘certificates of having lent money.’ With government bonds for individuals, you can lend money to the government starting from 10,000 yen.
*The number of coins in the video is for illustrative purposes. Interest rates vary by product and time. Interest is subject to tax (20.315%).
*This article explains the mechanisms and does not recommend any specific product (it is not investment advice).
References: Ministry of Finance ‘Government Bonds for Individuals,’ Ministry of Finance Chugoku Local Finance Bureau ‘Risks and Returns of Financial Products (Stocks, Bonds, Investment Trusts),’ Financial Literacy Promotion Organization ‘Financial and Economic Navigation: Main Financial Products and Their Characteristics ②: Bonds’