A bond investment is a type of financial instrument where an investor lends money to a borrower, typically a company or government, for a set period of time in exchange for regular interest payments. Bonds can be issued by governments or corporations to raise funds for various purposes, such as financing projects or operations
. When you invest in a bond, you become a debtholder or creditor of the issuer, and the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the principal amount, also known as the face value or par value, when it matures or comes due after a set period of time
. Bonds can be divided into different categories based on their issuer, credit rating, and maturity. Some common types of bonds include:
- Government bonds : These are issued by governments and are generally considered safer investments due to their stability and ability to raise taxes if needed to cover debt payments
- Corporate bonds : These are issued by companies and can be further divided into high-yield bonds (also known as "junk bonds") with low credit ratings and investment-grade bonds with higher credit ratings
- Domestic or international bonds : Bonds can also be divided based on whether their issuers are inside or outside the United States, with the U.S. market making up only a portion of the world's opportunities for bond investing
Bonds are often recommended as part of a diversified investment portfolio due to their lower volatility compared to stocks and their ability to provide a steady stream of income from interest payments prior to maturity
. However, bonds also have risks, such as credit risk (the issuer may fail to make timely interest or principal payments and default on its bonds) and interest rate risk (interest rate changes can affect a bond's value)
