Basics of bonds
It can be helpful to think of a bond as an I.O.U. note. When you buy a bond, you are loaning money to the government, a company or a person issuing the bond. While money is loaned out, you collect interest. Eventually, your bond matures, meaning you get your money back, plus interest. Interest rates can change over time. For example, when interest rates rise, bond prices fall. If your bond has a long maturity, it is more sensitive to risk.
A bond can also be “called,” meaning the company/government that sold the bond can buy it back before it matures. This isn’t always a bad thing. Sometimes you can make good money when this happens.
Why use bonds?
You learned about diversification when you read about stocks. Investing in bonds is a good way to do this. You are reducing your risk factor by putting your money in different places.
Here are some of the benefits: