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.
-
UBS Global's Solita Marcelli: It's a Green Light for U.S. Stocks in 2025A strong economy, rate cuts and continued AI spending should support stocks in the new year, says UBS Global's chief investment officer, Americas.
-
General Mills Stock Is Sinking After An Earnings Beat. Here's WhyGeneral Mills stock is one of the worst S&P 500 stocks Wednesday as weak full-year guidance offsets better-than-expected earnings. Here's what you need to know.
-
Europe Faces Economic and Political Headwinds Next YearThe Letter Challenges for Europe: Potential tariffs, high energy prices and more competition from China will weigh on the bloc in 2025.
-
Don't Sleep on Japan's Economic TransformationThe Letter After almost three lost decades, Japan — one of the world's biggest economies — is finally showing signs of life.
-
Start-ups Trying to (Profitably) Solve the World’s Hardest ProblemsThe Letter More investors are interested in companies working on breakthrough science to tackle huge societal challenges. The field of deep tech has major tailwinds, too.
-
Will lower mortgage rates bring relief to the housing market?The Kiplinger Letter As mortgage rates slowly come down here's what to expect in the housing market over the next year or so.
-
The Big Questions for AR’s FutureThe Letter As Meta shows off a flashy AR prototype, Microsoft quietly stops supporting its own AR headset. The two companies highlight the promise and peril of AR.
-
China's Economy Faces Darkening OutlookThe Letter What the slowdown in China means for U.S. businesses.
-
Should We Worry About the Slowing U.S. EconomyThe Letter With the labor market cooling off and financial markets turning jittery, just how healthy is the economy right now?
-
Kiplinger Special: How Businesses Should Budget for 2025Kiplinger Forecasts From fuel to AI software subscriptions, here's what you can expect to pay next year.
