What is a bond?
When you buy a bond, you are loaning the issuer of the bond money for a certain period of time. In return for the loan, the issuer promises to pay you fixed interest payments on a regular basis, usually semi-annually, and to return the full principal loan amount to you at the end of the time period. So a bond is essentially an "IOU" written by the issuer of the bond to you. Like stocks, bonds may also be purchased on the secondary market.
How are bonds structured?
Bonds, in the most general sense, are issued with three essential components that will define the terms of the bond.
What kinds of bonds are available?
Bonds are issued by a variety of entities to satisfy a variety of capitalization needs.
Government bonds may offer tax advantages in some situations. Ask your Financial Consultant for more details on tax consequences for various types of bonds.
How are bonds different than stocks?
When you buy a corporate bond, you become a creditor to the corporation. Which means if the corporation files for bankruptcy protection, you have a senior claim for return of your principal over stockholders in the liquidation of assets. Principal and interest for bonds issued by government entities are backed by their taxing authority. In the case of U.S. government agency bonds, they are guaranteed by the full faith and credit of the U.S. government.
Why choose bonds?
Bonds offer a wide range of benefits that are attractive to conservative, moderate and aggressive investors alike.
What risks are bonds vulnerable to?
As with any type of investment, bonds are subject to risk. Understanding your risk tolerance will help you make choices about how these risks will affect your decision to invest in bonds.