Bonds are a form of debt investment. When you buy a bond, you are essentially lending money to an entity, typically a corporation or government. In return, the issuer agrees to pay you interest at fixed intervals and return the principal, the initial amount invested, on the bond’s maturity date.
Why Invest in Bonds?
- Steady Income: Bonds provide a predictable income stream through regular interest payments.
- Diversification: Adding bonds can diversify a portfolio, potentially reducing risk.
- Safety: Government bonds are considered safe investments.
Types of Bonds
- Government Bonds: Issued by national governments, these are considered low risk.
- Municipal Bonds: Issued by states, cities, or other local governments, often tax-exempt.
- Corporate Bonds: Issued by companies. Higher risk than government bonds but usually offer higher interest rates.
Key Features
- Face Value: The amount paid to the bondholder at maturity.
- Coupon Rate: The interest rates the issuer pays to the bondholder.
- Maturity Date: The date when the bond will be repaid.
How Bonds Work
- Purchase: You buy a bond at its face value.
- Interest Payments: You receive regular interest payments (coupons) until maturity.
- Repayment: On maturity, you get back the face value of the bond.
Risks and Considerations
- Credit Risk: The risk that the issuer won’t make timely payments.
- Interest Rate Risk: Bond prices inversely correlate with interest rates. If rates rise, bond prices typically fall.
- Liquidity Risk: The risk of not being able to sell the bond quickly.
