What Are Bonds?

Bonds are completely different than stocks. Stock is a certificate thatt proves ownership of a piece of a business. A bond is a debt security. This means that a bond is like an I.O.U.. Bonds are purchased so that the purchase money is loaned to a government, corporation, municipality, federal agency, or any other entity. This entity is known as the bond issuer, and in exchange for the loan of money a bond issuer agrees to pay the principal, which is the purchase amount and face value of the bond, plus the bond pays a specific rate of interest during the life span of the bond.

Unlike the stock market, investing in bonds is not considered high risk. The types of bonds available to invest in are numerous, and they include United States government securities, like U.S. Treasury Bonds, foreign government bonds, corporate bonds, and federal agency securities. Investing in bonds is usually suggested to anyone who is thinking about investing. Most personal financial advisors advise their clients to keep a diversified investment portfolio which consists of bonds, stocks, and cash in various percentages. Bonds usually provide a predictable stream of interest plus your initial investment is returned as well. This makes bonds a pretty safe investment with no losses. Investing in bonds, no matter what the reason is, is a smart investment for an investor who does not want to take big risks with their investment capital.


Bonds are a great investment for retirement planning, with low risk and predictable income payouts. Most retirement plans today are defined contribution plans like 401(k) plans. These plans allow the individual to control their own retirement investments, unlike the traditional retirement plans which had a fixed rate of benefits no matter what the circumstances are. More people are taking charge of their own retirement planning. Bonds are an excellent way to do this and preserve your capital while making a profit from the interest.

Different bonds may have different interest payouts, depending on the issuer and the level of risk involved. Fixed income securities, or bonds, give investors choices that do not include as much risk as investing in the stock market. Using a personal financial planner can help you figure out exactly what portion of your investment portfolio should be in bonds. Bonds are considered low risk, and an investor who purchases bonds will receive interest payments for the life of the bond, and then get back the face value of the bond when it matures. Talk about a win win situation.

Copyright © 2007 Joel Teo. All rights reserved.

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