Bonds are debt securities that are issued by governments, municipalities, and corporations. They are essentially loans that investors make to the issuer in exchange for regular interest payments and the return of the principal at maturity.
When a company or government wants to raise money, it can do so by issuing bonds. The bond issuer promises to pay the bondholder a fixed rate of interest (also known as the coupon) at regular intervals and to repay the principal (face value) of the bond when it matures.
Bonds are considered to be less risky than stocks, but also have lower potential returns. This is because bonds are considered a debt obligation and the issuer is obligated to pay the interest and return the principal to bondholders. However, the issuer’s ability to make those payments can be affected by their financial health and creditworthiness.
Bonds are often used as a way to diversify a portfolio, as they tend to have a low correlation with stock prices and therefore, can balance out the overall risk level in a portfolio. They also provide a steady stream of income, which can be especially attractive to investors who are looking for regular and predictable income.
There are different types of bonds, such as Treasury bonds, municipal bonds, corporate bonds, and high-yield bonds (also known as junk bonds). Each type of bond has its own characteristics and risk level, and it’s important to understand the risks and rewards of each type before investing.