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Ever wonder why your credit card interest rate changes, why mortgage rates go up and down, or why borrowing money can suddenly become more expensive? In this episode, Sharran breaks down the often-misunderstood world of bonds, how it works and how money moves.
He starts with the simplest definition: a bond is simply debt. From there, Sharran explains why access to capital matters, the difference between bonds and stocks, and how bonds influence the broader economy. He walks through four major types of bonds and explains the significance of the 10-year Treasury matters.
It doesn’t take a finance degree to understand bonds and how they work. Sharran turns a complicated financial concept into practical ideas to help you make better sense of interest rates, borrowing, investing, and the economy.
“If the bond market stops for even one day, the entire world will shut down.”
~Sharran Srivatsaa
Timestamps:
00:00 – The simplest way to understand what a bond is
02:36 – 3 reasons why bonds are important
05:08 – Bonds vs. stocks: debt vs. ownership
07:41 – The four major types of bonds
15:21- How the bond market affects everyday money
Resources:
– The Next Billion by Sharran Srivatsaa
– Board Member: ARC Multifamily Real Estate Investing
– Board Member: The Real Brokerage
Connect with Sharran:
– X
– YouTube
– Threads
Transcript:
[00:00:00] If you don’t understand bonds, you just don’t understand money. And the reason you don’t understand bonds is because no one has actually taken the time to explain it to us, unless you’ve taken a really high, fancy technical financial course. That’s why most people don’t really understand how bonds actually work, and but once you do, it unlocks how money works entirely for you.
[00:00:23] Hey, my name is Sharran Srivatsaa, and I’ve had a chance to build two billion-dollar companies. And a chance to invest in over 100 plus deals, and today I’m the CEO of acquisition.com, uh, where I work with my partners Alex and Leila Hormozi. And I learned a lot about the bond market when I was a banker at Goldman Sachs on Wall Street.
[00:00:43] Just being there showed me the internal workings of how all of it works, and I wanna take all of that experience and break it down for you so that you understand it at a very operational level on how you could actually use it in your life right now. So let me ac- tell you the big question, which is, what is a bond?
[00:00:59] And the [00:01:00] easiest way to think about it is just replace bond with debt. Bond is just debt. So any time someone says, “Hey, I have this fancy bond,” just think about it as fancy debt. A bond is just debt. And the reason it has the wording of a bond is because you make your bond to pay that debt. That’s why it’s called a bond.
[00:01:24] And if you just understand that a bond is debt, everything else becomes extremely simple. Now, uh, you may say, “Well, if a bond is debt, why are bonds actually important? How can you actually say that if you understa- if you don’t understand bonds, you don’t understand money?” And that is because having access to capital is so important in the world.
[00:01:43] Any time anyone is struggling, it is just about access to capital. In fact, when I wake up in the morning, there’s only one number that I actually look at. I don’t look at the stock market. I don’t look at the headlines. I don’t look at the social media feed. I only look at one number, and that is the 10-year treasury or the 10-year bond.
[00:02:01] If I know what the 10-year Treasury and the 10-year bond is doing, it gives me a sense of how the entire economy is working. And as of today, when we’re recording this episode, the 10-year Treasury, the 10-year bond, is yielding 3.9%. Now, if that number is significantly higher, say it’s 7 or 8%, you know that we are in risky territory in the market.
[00:02:21] If that number is significantly lower, you know that the money is moving much more freely. So knowing what a bond is, which is being debt, and the second is having it being important, which is like how does it actually work in the marketplace, is good. Now, there are three main reasons why bonds are important, and the first is that- you want access to capital.
[00:02:45] Every business across the world needs access to capital. Now, what does that mean? Businesses, whether they are HVAC companies or large banks, all need access to capital to move cash around. In fact, you and I need access to capital. When you, uh, show up at a Starbucks and you swipe your credit card, what happens?
[00:03:03] There’s a transaction that happens, and someone is paying for that. You’re not paying for it until 30 days later. Someone is paying for that. So access to capital is constantly, uh, allows for money to move around the world, and the only way you can do that is if someone is willing to lend money to move around the world.
[00:03:18] So number one is access to capital. Number two is banks are not always the best access to capital. There’s a wide variety of businesses, maybe 90-plus percent of businesses, that actually cannot get access to bank financing because if you said… If you went to the bank and said, “Hey, uh, my daughter and I are starting a company to sell unicorn products,” they are gonna be not very excited to lend you any money to be able to do that because you don’t have any track record.
[00:03:48] You don’t have actual inventory. You’re probably drop shipping from China. You have a website. You think… They think it’s a hobby for your, for your daughter, and if that business went, um, didn’t do well, then they can’t come after you or your daughter in any way. So that business is not very bank financing friendly.
[00:04:07] So if bank financing is not the right approach for all businesses to have access to capital, you need another access to… another set of access to capital, and that is why the bonds are important because any company, including you, can issue a bond. What is a bond? It’s just debt. Any company can issue debt.
[00:04:27] You can get debt from the SBA for a financing loan. You can get the debt from a bank. You can get the debt from, um, a, a business partner. You can get debt from me, and you can say, “Hey, Sharran, I want you to… I’m thinking about expanding my business and opening five more Subway locations. I would love for you to invest in this, and the way I want to invest is maybe could you give me a million dollars for this return?”
[00:04:45] What am I doing? I’m just g- You’re giving me a bond. It’s just debt. That’s why bonds are important, because it creates a liquidity and access to capital when most people don’t have access to capital. And the reason why people w- would rather do a bond or debt as opposed to get ownership in your business is because owner- getting ownership in someone’s business gets really messy.
[00:05:05] That’s the next question I wanna u- answer for you, which is, what is the difference between bonds and stocks, right? So I’ll use an easy example so you understand. Let’s say you, uh, were going to buy a house. If you bought a house, generally there’s two pieces to buying a house. Number one, you put some money down, and second, you get the rest of it as a loan or a mortgage from the bank.
[00:05:30] Well, the loan or a mortgage from the bank is debt, essentially a bond, right? And the rest of the money that is left over, the down payment that you put down, is your equity, right? So equity is the stock, and everything else is the bond. And for most people, the equity is just the ownership in the asset. You can have 100% ownership.
[00:05:52] You have 100% ownership in your house If I bought a house today, I have 100% ownership in my house. No one else owns it. It’s just that after I pay off my debt, after I pay off the mortgage, then I have 100%. That’s all that means. So the bank could give me a mortgage, which is just a bond, which is just debt, but I still have 100% ownership in my house.
[00:06:13] The ownership is the equity. The ownership is the stock. So you have 100% ownership of stock in your house. Now, take the same exact thing to a company. Let’s say you run a private company, say it’s a e-commerce business, and you’re doing $5 million a year, and you own that business 100%. Well, you have 100% of stock in your business.
[00:06:35] But maybe you went to the SBA and you got a million-dollar loan. Well, that is a bond. That is just debt. But you still own 100% of the equity or the stock in your business. Now, if you take it to an even bigger level, think about, um, Microsoft or Google or Amazon. Well, they are some of the biggest bond issuers in the marketplace.
[00:06:56] You can still own a st- share a stock of Amazon or Google or Disney or Tesla. Owning that piece of stock, you are a part owner in the company after all the obligations of the company are paid. After. So a stock is a right to ownership in a business. A bond is just the debt in the business to allow the business to operate, but the bond has to get paid off first, so the debt has to get paid off first before you get your equity overall.
[00:07:25] So you may say, “All right, Sharran, you’re talking about these bonds. I don’t… No one talks about bonds day to day. I- does it even matter in my life? Like, what kind of bonds are they? Do I even need to know any of these?” Well, you should know what they are so that when you hear the words, it actually triggers the right thing for you.
[00:07:41] Uh, there’s four kind of broad types of bonds that you need to know about, and if you just hear it one time, you’ll know exactly what I, what I mean by that. The first one are government bonds or what, uh, what in the US we call Treasury bonds. That is the US Treasury actually issues bonds to the world, and anybody, including you and I, can go buy a US Treasury.
[00:08:00] It’s a Treasury bond. Um, the largest holder of Treasury bonds right now is actually China. China believes that the US, the debt, the debt that the US is offering is so secure that they want their cash in US bonds. Now, there are some geopolitical reasons why China wants to own a lot of this, and we could go into that, but anyone can own US Treasury bonds, and that bond has to be backed by something.
[00:08:30] Now, this is the key part that you need to understand. A bond needs to have some kind of collateral, just like debt needs to have some kind of collateral. When you get a… When you have a house and you have a mortgage, you have debt. The collateral is your house, right? But when the US Treasury says that they’re gonna issue a bond, what is the collateral?
[00:08:50] The collateral is the g- is the good faith interest in the United States. That’s why they say the US cannot default, ’cause once it defaults, it c- it, you know, has this cascading impact of all the pain that can happen. So the first type of bond that you’ll hear often is a government bond or a Treasury bond.
[00:09:09] Uh, the government, government bond or a treasury bond is actually considered to be the safest investment in the world right now. So if you live in America and y- you buy a US Treasury, that is the safest investment in the world right now. It’s to the point where they actually call it their risk-free rate.
[00:09:27] Think about that. So if you hear about something called the risk-free rate, that means that if you invest in the treasury bond, you n- that, the, the world is saying you take almost no risk by investing in this, and you get a certain rate of return. So the first type of bond is a government bond or a treasury bond.
[00:09:43] The second type of bond is a municipal bond, and this only, uh, matters for, uh, if you live in the United States, and other countries have something like this. But a municipal bond is where the municipality or, like, a state or local municipality issues the bond. Now, it’s very important to know the distinction of this because it has y- uh, enormous, uh, benefits if you know how a municipal bond works.
[00:10:09] So let’s say the state of California. Crazy state. Uh, you pay 13% extra in taxes. Uh, you still get 72-degree weather to live here, but you pay a lot in taxes. But the state of California may say, “Hey, we want to build a new highway system, and for that, we’re going to issue this highway bond.” And what that means is when the state of California issues that bond, a couple of things are true.
[00:10:31] The first is it’s backed by the state of California, and the second is most states, when they issue a municipal bond, they actually give you tax advantages. They’re like, “A state of California, you’re a California resident. California’s willing to do this. You, as a resident of the state of California, are willing to invest in this bond; therefore we’re gonna give you a break from California state taxes for the interest r- associated with that bond.”
[00:10:54] It’s actually a really good thing. But the key part is this: A municipa- municipal bond is, uh, has… There are two kinds of bonds when it comes to. The first is called a general obligation bond, which means that a municipality will almost never default on their bond because what they can do is they have the right to unilaterally raise taxes to pay back your bond, to pay back your debt.
[00:11:19] So if I invested $100,000 in the California highway system bond and it was a general obligation bond, that means that it is almost as close to the risk-free rate as possible. Meaning the state of California, if it could not pay the bond in some way because of its economics, could unilaterally raise taxes and then pay me back that bond.
[00:11:39] The second type of bond is called a revenue bond, and a revenue bond is generally used for key projects, and let me tell you what I mean by that. Let’s say, uh, the state of California is building a bridge, and they’ll say, “This is a revenue bond,” and they’ll build… They raise this money, and they build the bridge, and the entire r- the way they actually pay the bond back is from the revenue of that bridge, which is why you see tollways.
[00:12:01] When you see a toll, the reason for that is not because the state of California wants to charge a toll. It’s because, generally speaking, that toll is connected to the revenue that that project creates to pay back the bond, to pay back the debt holders associated with that project. That’s why whenever I see opportunities to invest in municipa- municipal bonds, I always wanna see: do I want this to be a general obligation bond or a revenue bond?
[00:12:28] Me personally, I like the general obligations a lot more because I know that they’ll never default on it ’cause you can unilaterally l- raise taxes to actually pay that bond back. The third most interesting type of bonds are, uh, corporate bonds. This is the least known vehicle out there. So if there’s one single vehicle that you need to know when it comes to managing your financial future, and that is understanding how a corporate bond works, meaning a company like Google or Amazon or Tesla or Yahoo will essentially say they’re going to go out to the market and issue some debt, issue a bond where you can invest in that business, and you’re loaning that business money, and they’re going to use the profits of their business to pay back your debt.
[00:13:17] And it’s crazy because y- they’re gonna pay back your debt before they pay back, uh, any of their, you know, any, any of their stockholders in any way. And the reason this is important because most of these big companies are gonna do capital expand- expansion projects. They’re gonna actually need money for operations, and they don’t have any other way to go get money from the public markets because just they’re not always gonna get the size of money that they need for bank financing.
[00:13:42] So I currently own several corporate bonds, and the easiest way to invest in corporate bonds is you should just get a corporate bond ETF. Uh, you can actually Google exactly what they are, but a corporate bond ETF is a good one because it allows you to get a little bit more interest rate instead of just having your money sit in cash.
[00:14:00] So a lot of people, uh, take all their money and just leave it in cash in their checking account. That probably gives you .1, .2, .3% or whatever the prevailing rate is. Instead, if you can get a portion of that and not have it be lazy cash and invest in the corporate bond market, that means you’re getting paid somewhere in the 5 to 9% based on you, uh, loaning money as a bond, as debt to this company.
[00:14:25] That is a third way in which you have corporate bonds where companies from around the world, both public and private, can actually issue some debt to have investors that are, uh, you know, you and me and companies, et cetera, that can actually get access to the bond. The last one, though, is actually called private credit.
[00:14:43] This is my favorite of all of the bond types. Private credit is just a form of debt, which means that private companies like you or I now have the ability to issue a bond, issue debt to companies. There are times when, you know, you are not… you can’t go to the bank to get debt to do a certain project, and you say, “Man, I’m just going to, uh,” they call it pass the hat around or syndicate the debt to other private investors, and that is called private credit.
[00:15:12] That allows you to get a, uh, a, a wider pool of investors to actually get, uh, access to capital that you would not get otherwise. The key part in all of this is if the bond market stops for even one day, the entire world will shut down. Because when the world needs money to run on itself, the bond markets are the ones that create the capital and the liquidity that is needed for the entire world to run, which means that credit cards will stop working, um, trucks cannot move because they don’t have access to capital to actually buy goods and services.
[00:15:49] No one can actually buy inventory to, uh, to, to stock these stores and restaurants. The fact that the entire world is based on one number, which is roughly the 10-year Treasury or the 10-year risk-free rate, is amazing to me, and that is the one thing that is not taught to anybody. So the next time you’re curious about why your credit card interest rate went up, or why your student loan balance went up, or why, um, you suddenly you see mortgage rates come down, you’ll start to realize that it’s not got to do th- with the essential health of the economy or because there’s a war in Iran or because, uh, you know, OpenAI released some new AI.
[00:16:31] It’s because everything is tied to access to capital, and access to capital is entirely based on understanding what a bond is. So hopefully, as you listen to this, you will realize and keep your eyes and ears open to what a bond is, and you will know that if you don’t understand bonds, you will never understand money.