Bond Part 1

    The easy definition of bond is that we lend our money to others (called "principle") and then we will get the specific amount of return ( called "interest"). For instance, saving the money at the bank is one of the bond types. Some people might disagree with me about saving as type of bond, because saving is the same as cash. It has high liquidity. However, I just want to keep it simple here.

    Bond could be variously categorized, but, in my opinion, we do not need to know all of them, just some of them are enough. So, I will categorized bond based on the following criteria.

    1. Time
    2. Types of borrower (Given we are a lender)

          1. Time

            In terms of time, bond can be divided into short-term bond (mature in less than 1 year) and long-term bond (mature in more than 1 year).>>> Test!.... What kind of bond is the 3 months saving ?....."Short-term bond"......That's right!

            I would like to share something about the return between these two that the return of short term bond (mostly) is less than long-term bond. Why?....... because the risk of the long term lenders are higher than those of short term. For example, imagine that you lend the money to 2 people. The first person is 3 months. The second person is 3 years. 3 months is as fast as the flash of the lightening, but 3 years lending is much longer. (WW III might break off before you get your money back!!)

          2. Types of borrower (Who we invest the money in?)

Borrower	Name of products
2.1 Private company	Corporate bond
2.2 Bank	Saving/ Certificate of Deposit (CD) etc.
2.3 Government	T-bill/ Government Bond

Food for Thought! >> If all three borrowers above want to borrow your money with all the same features, who has the right to give you the lowest interest?...... The answer is "government"..... Why? some people might argue that government is not as good in making money as private company or bank, so lending the money to government should have higher risk. I can tell you that this logic is very controversial right now, because we all know that , theoretically, government is the risk-free organization. Therefore, the interest from the government bond should be the lowest  in the bond market.

    Ironically, let's see what have happened recently. In 2012, Greek government could not pay its debt because of bankruptcy. It needed to negotiate with the creditors around the world. Some of the creditors get their money back just 30-40%  of their principles
    If anyone argues that Greece is a small country which has no strict regulations like big countries, follow this link and you will see, now, big countries also have debt problem like Greece.
http://en.wikipedia.org/wiki/List_of_countries_by_public_debt

    Well.......Nothing is certain but the unforeseen....

    Today, while I was writing this article, I read the news about Detroit. Detroit announced that it needed to suspend the pension fund payment because of the near bankruptcy. It taught me the lesson that even though we have saved the money for all our life in the safe place, we still might not have a chance to use that money. So, learn how to make a wise "investment" decision with me.