Bonds
A fixed income security is a debt instrument issued by a government or corporation. It pays a fixed rate of interest over a set period of time, usually several years. When you buy a bond, you are essentially lending money to the issuer in exchange for regular payments of interest and the eventual repayment of the principal at maturity.
Furthermore, bonds can also be used to diversify your portfolio by providing exposure to different sectors and industries, as well as different countries and currencies. By diversifying your portfolio, you can reduce risk while also potentially increasing returns.
In addition to this, bonds can be used to hedge against inflation. As inflation rises, the value of bonds decreases; however, the regular payments still remain constant.
What is a bond?
Bonds are issued by governments, corporations, and other entities to raise money. They are typically used to finance large projects or to purchase goods and services. Investors purchase bonds in exchange for a fixed rate of interest over a fixed period of time, usually several years. Bonds can be seen as a form of loan and investors are essentially lending money to the issuer. In return, the issuer promises to pay back the loan plus interest at regular intervals until the bond’s maturity date.
Advantages
of bonds
-
Security
Investing in bonds offers assurance that the full amount of money loaned out will be paid back completely when the loan matures.
-
Regular Income
People who require consistent returns, such as retirees, may find greater assurance through a bond's regular interest payments compared to other investments.
-
Performance
It is possible to gain a more rewarding return from certain bonds, such as corporate bonds, than from other investment vehicles (like term deposits).
-
Diversification
Bonds have the potential to offer a balancing effect to an investor's portfolio because they don't always move in the same direction as stocks.
Start your wealth plan today
Insights
We give you exclusive access to inspired thinkers and thought leaders in finance and beyond, whose ideas are helping to shape the world.