Bonds can help diversify your portfolio, but they are not risk-free. Find out what a bond is, how bonds work and how they may work for you.
What is a bond?
Bonds are IOUs issued by corporations, federal, state and local governments and their agencies. When you buy a bond, you become a creditor of the corporation or government entity; it owes you the amount shown on the face of the bond (par value), plus interest.
In most cases, you won't receive the actual bond certificate. Bond ownership usually is in the form of a "book entry," meaning the issuer keeps a record of buyers' names but sends out no certificates. Treasury bonds, for instance, are issued in book entry form.
How do bonds work?
Typically, bonds that are lower risk pay lower interest rates; bonds that are riskier pay higher rates in exchange for giving up some safety.
Bonds are sold below par value, also known as face value. You get a fixed amount of interest on a regular schedule — monthly, quarterly, semiannually or annually — until the bond matures after a specified number of years, at which time you are paid the bond's face value. The interest rate is fixed at the time of the bond purchase.
Short-term bonds generally mature in three years or less. A bond that matures in three to ten years is called an intermediate-term bond. Long-term bonds typically mature in 20 to 40 years, although some are issued for shorter periods.
Three important facts to remember:
- Bond prices fall when interest rates go up — Bond prices and market interest rates generally move in opposite directions. When market interest rates rise, prices of fixed-rate bonds fall. This is known as interest rate risk.
- Bonds can be sold before maturity — After bonds are issued, they can be freely bought and sold by individuals and institutions in what's called the secondary market, which works something like a stock exchange. One exception — U.S. Savings bonds — can not be resold. However, they can be redeemed prior to maturity.)
- Bondholders get priority when a business fails — Bondholders own debt, not equity. If the issuer goes broke, you have first claim on the issuer's assets, ahead of stockholders. Some bonds are secured by liens on specific assets. If not, you are paid from the proceeds of liquidated assets.
Bottom line
When deciding whether to buy a bond, you should assess your risk tolerance and how long you want to keep the money invested. This will help you determine which bond will best serve you and satisfy your financial needs.
-
Holiday Shopping? Here’s Why Some Stores May Let You Keep Your ReturnsWith the holiday shopping season in full swing, you're likely to find more stores shunning returns in favor of a 'keep-it' policy, study finds.
-
Stock Market Today: Stocks Swing Higher After Powell Speech
Fed Chair Powell poured cold water on potential rate cuts, but stocks jumped anyway.
-
FDA Approves Zepbound, the Latest Weight-Loss Drug: The Kiplinger Letter
The Kiplinger Letter Eli Lily’s Zepbound will undercut its rivals’ pricing but still costs over $1,000 a month.
-
More Signs of Belt-Tightening and a Slowing Economy: The Kiplinger Letter
The Kiplinger Letter Although fewer banks are tightening lending standards, more businesses and households are feeling the squeeze.
-
The Recent Uptick In Global Trade Won’t Last: The Kiplinger Letter
The Kiplinger Letter Global trade continues to fall as economic growth around the world cools.
-
Consumers Have $1 Trillion More Savings Post-Pandemic: The Kiplinger Letter
The Kiplinger Letter GDP data show Americans have more savings than they did pre-pandemic.
-
Once-Booming Gun Sales Have Slumped: The Kiplinger Letter
The Kiplinger Letter Since 2022, FBI background checks, a close proxy for gun purchases, have slumped.
-
Best Books on Investing
investing Those looking to build their wealth should consider these best books on investing.
-
The Era of Super-Low Interest Rates Could Be Over: The Kiplinger Letter
The Kiplinger Letter We’re likely never going back to the historically low rates that prevailed in late 2019 and early 2020.
-
Rental Market Will Slow Through 2023: The Kiplinger Letter
The Kiplinger Letter Expected growth in the rental market is likely to remain slow for the rest of the year amid a slow housing market and cooling economy.
