What is a Bond
Bonds are loans, or IOUs, but you serve as the bank. You loan your money to a company, a city, the government – and they promise to pay you back in full, with regular interest payments. Bonds are bought at a specific price, and offer interest income based on a coupon rate.
Check out this video from Investools that provide more information about bonds.
Reasons to Invest in Bonds
- High and reliable income: While many investments provide some form of income, bonds tend to offer the highest and most reliable income streams. Bonds provide decent returnss with a lower level of volatility than shares, and with higher income than saving accounts or cash.
- Diversification: Common saying among investors is “don’t put all your eggs in one basket.” It may be a cliché, but its time-tested wisdom nonetheless. Over time, greater diversification can provide investors with better risk-adjusted returns than portfolios with a narrower focus. More important, bonds can help reduce volatility – and preserve capital – for shares investors during the times when the stock market is falling.
- Protecting your principal (initial investment): Bonds are very useful for people nearing the point where they will need to use the cash they have invested – for instance, an investor within five years of retirement or someone who needs to tap their child’s college fund to pay for school.
Disadvantages of Bonds
- Bonds are affected by interest rates and currency rates: Unlike shares the price of bonds goes down when the interest rates rise, and a weaker currency reduces the worth of your returns.
- Inflation reduces returns: Unlike shares, bond prices do not go up with prices, and your above inflation returns reduce.