Bonds are fixed income investments that seek to return your capital on maturity and offer a fixed amount as interest that results in additional income for you, on a periodic basis. When a company or a government agency needs to raise cash, it may opt to borrow the money it needs from the public through the selling of bonds. The company or government agency which is issuing the bond outlines how much money it would like to borrow and specifies a length of time, along with an interest rate it is willing to pay. Investors who then lend the requested money to the issuer become the issuer’s creditors through the bonds that they hold.

As with most loans, the borrower pays interest to the lender. Interest payments on a bond are usually fixed, although bond prices fluctuate in value and are sensitive to changes in interest rates of the currency in which they are denominated.

Why invest in bonds?

Growth and Stability: Bonds are generally considered a less risky investment than stocks. Although they can be volatile, depending upon the issuer and the quality of the bond issued, the bond or fixed income markets tend to be less volatile than equity markets. Therefore, a bond fund can serve as a balance to a portfolio that holds stock mutual funds. This means that although bond share prices move up and down in value, they have historically tended to have less extreme price movements than most stocks, particularly in the short-term*.
*Past performance is no guarantee of future results.

Types of Bonds:

1. Government Bonds:

Government Bonds are also called Treasuries because the governments of most developed countries issue them, with the largest markets being the U.S. And Japan. Treasuries are issued with maturities spanning from three months to 30 years. Generally, these issues possess high quality ratings. U.S. Treasury securities provide fixed rates of return as well as principal guarantees if held to maturity. The investment returns and principal value of mutual funds will fluctuate, so that an investor’s shares, when redeemed, may be worth more or less than their original cost.

2. Corporate Bonds:

Companies sell debt through the public securities markets by issuing corporate bonds to help finance part of their business. A company then decides how much debt it wants to issue and what interest rate it will pay. High yield bonds, also called junk bonds, are corporate bonds issued by companies whose credit quality is below investment grade. While junk bonds are considered to have higher risk than most bonds, they also have the potential of yielding high returns.