The ABC of Investing in Bonds

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Simply put, bonds are a form of debt. Consider them loans or IOUs, and you’re the one who’s serving as the bank.

“You loan your money to a company, a city, the government — and they promise to pay you back in full, with regular interest payments,” The Wall Street Journal writes. By lending money to an organization for a specified amount of time, you can expect that organization to repay you the amount you initially paid when the bond reaches the end of its term. You’ll also receive interest payments, which are based on a set interest rate.

Why invest?

Many personal financial advisers recommend maintaining a diversified investment portfolio, according to Investing in Bonds. That means mixing it up between bonds, stocks, and cash.

The plus side of bonds is that you get back your entire payment once a bond matures, making it a safer investment than the stock market. According to Brass, bonds feed you a steady stream of interest payments throughout the term, which can help balance riskier investments (again, stocks).

You’ve also got options. You can choose from various term lengths that range from three months to thirty years. And you’ve got a say in bond sources. Corporate bonds are issued by corporations; municipal bonds are issued by government entities, such as states and cities; and U.S. Treasury bonds are issued by the U.S. Department of the Treasury.

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