A bond is a type of investment where you lend money to a government, corporation, or organization in exchange for regular interest payments and the return of your principal at maturity.
How It Works
When you buy a bond, you are essentially lending money. The issuer promises to pay you interest (called the coupon) on a set schedule and repay the original loan amount (the face value) when the bond matures.
Types of Bonds
- Government bonds: Issued by federal or local governments, usually considered low risk.
- Corporate bonds: Issued by companies, generally higher risk but with higher potential returns.
- Municipal bonds: Issued by cities or provinces to fund public projects.
Why Investors Buy Bonds
Bonds provide steady income and are generally safer than stocks. They help diversify portfolios, reduce risk, and preserve capital, though they may offer lower long-term returns compared to equities.
Final Thoughts
Bonds are a core investment tool, balancing risk and reward in a portfolio. They are well-suited for conservative investors or those seeking predictable income.