BONDS

THE BASICS

What is a "bond"?

Generally, a bond is an investment vehicle that is in many ways quite similar to a loan, debt security, or IOU. When you purchase a bond, you lend money to an issuer, which could be a government, local municipality/entity, corporation, or federal agency. As part of the deal between the bond issuer and the bond buyer, the issuer promises to pay the buyer a specific and stated interest rate during the life of the bond, and to repay the face value of the bond when it becomes due or reaches maturity.

What types of bonds exist?

Bonds are generally divided into different classes, including U.S. government securities, municipal bonds, corporate bonds, mortgage- and asset-backed securities, federal agency securities, and foreign government bonds. There are also the same categories of foreign bonds, denominated in local and other currencies, although the way in which you acquire these bonds may differ depending on the country. Please check with a foreign bond specialist for further information.

Which performs better, stocks or bonds?

For many years between 1870 to 1940, bonds performed better than stocks. Since then, stocks have performed better during most economic cycles.

What affects bond prices?

Many factors influence the prices of bonds, including interest rate movements and investor demand. Bond prices move in the opposite direction of interest rates; when interest rates rise, bond prices fall, and vice versa. If you buy a bond at a discount and hold the bond for its full term, you will get all your money back plus interest. If there is not much investor demand for a particular bond, the issuer may have to lower the price of the bond in order to create more demand for it.

Is your money safe in bonds?

As long as the issuer is financially sound, there is little risk of default on bonds. But if the company or government that issues the bonds has a major economic catastrophe, there is a risk—as in all other forms of investments—of losing your money.