A bond is simply a loan given to government or corporation in return for interest on the loan.
What is a bond?
When a government entity or corporation needs money to grow, it can access that money via multiple options, one of which is by issuing bond. A bond is issued for a fixed timeline, price and interest rate. An entity or individual who buys the bond is called bondholder and is paid interest over the timeline of the bond and gets the principal back at the end of term.
What are different types of Bonds
- Government Bonds – Issued by federal government
- Municipal Bonds – Issued by state or local governments
- Corporate Bonds – Issued by corporations
Why should I buy bonds?
Bonds pay a steady stream of interest payment over their lifetime and return full principal at the end of the term. This enables the bondholder to easily predict the rate of return on their initial investment. Bonds are thus considered safer investment than stocks and reduce overall risk of your investment portfolio. Additionally, interest earned on certain bonds may be tax free thus increasing their overall return.
How can I buy bonds?
The easiest way to buy bond is by opening an account in an online brokerage firm. You start by depositing cash in your account, research on what bond funds (Mutual Funds or ETFs) you are interested, buy and hold them, and sell as per your financial needs.
Is there no risk to owning Bonds?
Bond investing is considered safer than stock investing. However, they also provide lower returns compared to stocks. You will always get fixed return on your investment no matter how well the company may be doing.
In some cases, you may not get timely payments if the borrowing entity is experiencing hardship. In rare cases, you may completely lose your money if borrowing entity declares bankruptcy.
How can I mitigate risk?
There are multiple options to lower risk of bond investing:
- Buy Index Funds (basket of multiple bonds)
- Buy Mutual Funds or Exchange Traded Funds ETFs (basket of multiple bonds in one category)
- Buy bonds that are rated high quality and investment grade
Final Verdict
Bond investment provides stable returns and is thus considered safer than stock investment. However, keep in mind that they provide lower returns than stocks. Make sure you discuss your financial situation with a registered financial advisor before making any investment decision.
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