This FZ Daily will make more sense if you’ve read yesterday’s first.
G’head, I’ll wait. Okay, so to understand why we use bond and bond ETF’s for different purposes, first you need the basics of how each works.
Bonds today. Bond ETF’s tomorrow.
A bond is actually a loan to either a company or the government.
For instance, when you invest in a Treasury Bond, you are loaning the Federal Government your money.
And in return for that loan, they will pay you interest (called the “coupon”)…
and then at a pre-determined point in the future (called the “maturity date”)….
they’ll give you your principal back (called the “maturity value”).
For instance, if you invest in a $1,000 Treasury Bond with a 1% coupon and a November 1, 2031 maturity
date, you’ll get $10 a year until 11/1/2031 and then you’ll get your $1,000 back.
(If that sounds like how a Certificate of Deposit works at a bank, that’s because it is. A CD is just a loan to
the bank.)
So now you see why we use actual bonds to generate passive income – there’s a set maturity date and
therefore a predictable cash flow.
When the bond matures, you then use that principal for your living expenses.
Bond ETF’s don’t work that way. There is no maturity date and therein lies the problem.
And we’ll tackle that problem tomorrow.
