Bonds, also known as fixed income, are an investment you can purchase where you essentially lend money to whoever issued the bond in exchange for future income in the form of interest payments. At the end of the life of the bond, you get your original investment back. The interest payments and principal (amount of your investment) are guaranteed by the company or government that issued the bonds.
Who issues bonds?
There are different types of bonds and different types of entities that issue them. Government bonds are issued by different levels of government which can range from a small town to the U.S. government. Corporate bonds are issued by companies and although the companies can be small or large, most corporate bonds are issued by the larger companies.
How do you make money with a bond?
Most bonds pay a set amount of money every so often to the holder of the bond (that’s you). You are lending money out (via the bond) and the borrower (issuing company or government) pays you interest. This is the same sort of thing that happens in a savings account when your bank pays you interest on your deposits.
Why would I want to buy a bond?
Bonds are considered a less risky investment compared to stocks because the interest payments and principal are guaranteed by the issuer. Typically, “safer” bonds that are issued by the US government pay a lower interest rate, whereas “riskier” bonds issued by companies will pay a higher interest rate to compensate for the extra risk.
The risk with bonds is that if the company or government that issues the bond goes bankrupt or runs into financial problems, then the bond holder may not get their money back.