Most of us have been in the position where we have had to ask someone for money. It’s not a fun feeling. Well, how about being on the other side of the coin? Bonds are a form of investing that can generate earnings through what basically amounts to you loaning money to a company or government agency. One of the oldest ways to invest, a bond certifies that the issuer has borrowed a specific sum of money and needs to repay the principal and interest to the bondholder by a certain date.
So What’s The Attraction?
Bonds tend to be more predictable than other securities because many of the financial variables associated with them are known at the time they are issued. Many investors include bonds in their portfolios, therefore, to provide diversification and balance. The main attraction of bonds is that they can provide a source of fixed income for a defined period of time (assuming a bond is not “called,” or paid off by the issuer).
Certain types of bonds may offer less risk than many stocks. Of course, that generally means they offer lower rates of return. Then again, there are also types of bonds — junk bonds, for example–that are more risky than many stocks. If you want to add balance to a portfolio full of stocks, diversify your investments, or you like the idea of being a moneylender, you may want to consider what bonds can do for you. Learn as much as you can, because bonds are not that simple at face value (no pun intended).