What Are Bonds?
Bonds are loans made to large organizations. These include corporations, cities, and national governments. When you purchase a bond, you're lending money in exchange for interest payments over a fixed period.
Types of Bonds
Distinct bond types cater to different investors. Government bonds (treasuries) are considered low-risk. Municipal bonds fund public projects. Corporate bonds, higher-risk, support business operations and growth.
Interest Rate Nuances
Bonds have 'coupon rates' determining the interest payments. Interestingly, bond prices inversely correlate with interest rates. When rates rise, existing bond prices typically fall, and vice versa.
Bond Maturity Explained
Maturity refers to the bond's lifespan. Upon maturity, the borrower repays the face value. Bonds range from short-term (less than 3 years) to long-term (over 10 years), affecting interest and price volatility.
Risks in Bond Investment
Bonds are not risk-free. Credit risk involves the issuer's potential default. Inflation risk erodes return value. Interest rate risk affects bond pricing in the market. Diversification is essential.
Yield Curve Insights
The yield curve graphs bonds' yields against their maturities. A normal upward curve suggests a healthy economy with long-term bonds paying more. An inverted curve may signal economic downturns.
Fixed Income Alternatives
Beyond traditional bonds, fixed income includes money market funds, CDs, and asset-backed securities. These alternatives offer various risk and return profiles, enhancing portfolio diversification.
What do you purchase with a bond?
A share of company stock.
Interest in real estate property.
A loan provided to organizations.
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