What to Know Before Investing in Bonds

When you buy bonds, you’re lending money to governments and companies. In return, they promise to pay you interest for a specific amount of time and to repay the principal at a later date, or “maturity.” Bonds can play 2 essential roles in your investment portfolio: they provide a stream of income and help reduce the overall risk of your portfolio. Read more theinvestorscentre.co.uk

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Once a bond is issued, its value can be bought and sold in the secondary market, just like stocks. Its price can fluctuate based on the economic outlook, credit quality, and supply and demand. Bonds can be purchased directly from broker-dealers, as well as through mutual funds and exchange-traded funds.

There are many different types of bonds, with corporate bonds generally offering the highest yields and U.S. Treasury bonds the safest. Each bond has its own unique characteristics, including its indenture, which is a legal document outlining the bond’s terms. There are also organizations that rate the creditworthiness of each bond issuer, which can be helpful for investors.

Other risks of investing in bonds include interest rate risk, the possibility that a bond’s price will decline because of rising interest rates, and credit risk, which is the chance that the bond issuer won’t be able to make interest and principal payments as scheduled. However, diversifying your portfolio by investing in a variety of bond types can help manage these risks.