What are bonds?
Bonds are a type of investment that represent a loan made by an investor to a borrower, typically a corporation or government. When you buy a bond, you are essentially lending money to the issuer in exchange for periodic interest payments and the return of the principal amount when the bond matures.
Here are some key points about bonds:
1. **Interest Payments:** Bonds pay regular interest, also known as coupon payments, to bondholders. The interest rate is fixed when the bond is issued.
2. **Principal Return:** At the end of the bond's term (maturity date), the issuer repays the bond's face value (principal) to the bondholder.
3. **Types of Bonds:**
- **Government Bonds:** Issued by national, state, or local governments to fund public projects. Examples include U.S. Treasury bonds.
- **Corporate Bonds:** Issued by companies to raise capital for business activities, such as expanding operations or funding research.
- **Municipal Bonds:** Issued by state or local governments to finance public projects like schools, highways, or water systems. They often offer tax advantages.
- **Treasury Bonds:** Long-term bonds issued by the U.S. Department of the Treasury with maturities of 10 years or more.
- **Convertible Bonds:** Can be converted into a predetermined number of shares of the issuing company's stock.
4. **Credit Risk:** Bonds carry varying levels of risk based on the issuer's creditworthiness. Higher-risk bonds, known as high-yield or junk bonds, offer higher interest rates but come with a greater chance of default.
5. **Market Value:** Bond prices can fluctuate in the secondary market based on changes in interest rates, credit ratings, and other factors. When interest rates rise, bond prices typically fall, and vice versa.
6. **Diversification:** Bonds can be part of a diversified investment portfolio, providing stability and reducing overall risk.
Bonds are often considered a safer investment compared to stocks, but they still carry some level of risk. They can provide steady income through interest payments and help preserve capital.
