• Bonds are debt securities issued by companies, municipalities, and governments to raise capital.
• Most investors should have a portion of their portfolio in bonds as a diversifier since they have different characteristics from stocks.

What are bonds?

Bonds are debt securities issued by companies, municipalities, and governments to raise capital. Essentially, when an investor buys a bond, they are loaning money to the issuer. In return for this loan, the issuer promises to pay the investor interest on the money they have borrowed, as well as to return the principal amount at a later date, known as the maturity date.

Investors can buy bonds through a broker or directly from the issuer. It's important to research the credit rating of the issuer and the terms of the bond before investing.

Bonds are often considered a lower-risk investment option than stocks, as they offer a fixed rate of return and are typically less volatile. However, it's important to note that not all bonds are created equal, and some may carry more risk than others depending on the issuer's credit rating and other factors.

Types of bonds

• Corporate bonds: issued by companies to raise capital
• Municipal bonds: issued by state and local governments to finance public projects
• Treasury bonds: issued by the US government to finance its operations
• Agency bonds: issued by government-sponsored agencies, such as Freddie Mac or Fannie Mae, to fund specific programs
• Convertible bonds: can be converted into stock at a specific price
• High-yield bonds: also known as "junk bonds," these are issued by companies with a higher risk of default, and therefore offer a higher rate of return

Secured vs Unsecured Bonds

Bonds can be secured or unsecured.

• Secured bonds are backed by collateral (assets), which can be seized by the bondholder if the issuer defaults on the bond. Collateral can include assets such as property or equipment.
• In contrast, unsecured bonds are not backed by collateral and are considered riskier than secured bonds. interest and principal are only guaranteed by the issuing company. However, they may offer a higher rate of return to compensate for the increased risk.