Bonds are essentially loans made to large organizations such as corporations, municipalities and national governments.
Bondholders issue a loan to an organization with a set amount of interest, and the borrowing organization promises to pay the bond back at an agreed-upon date (while paying interest in the meantime).
People buy bonds because they can provide a predictable income stream through interest payments. If the bond is held to maturity (when the bond is due for repayment), bondholders can get back the entire principal, so bonds are a way to preserve capital while investing. Also, bonds can help protect the money you invest in more volatile stock holdings.
There are three main types of bonds:
Treasury Bonds – issued by the United States Government; considered risk-free.
Corporate Bonds – issued by corporations to fund a business-related expense.
Municipal Bonds – issued by states, counties and cities to finance public projects.
There are several factors to consider before deciding to invest in bonds. We recommend speaking to an experienced financial adviser to help guide your decision.