Category: Bond Investing

When many people think about investing, they think about equity first and foremost rather than bonds. But bond investing is another powerful tool for people to have in their financial arsenal.

When a person invests in bonds they are loaning a sum of money to an entity in exchange for fixed interest payments and an eventual return of the loan value. The bond issuer is the entity that is in need of funding and so issues bonds to bondholders.

Generally the entities that issue bonds to investors fall into two distinct categories: governments and businesses. Government bonds such as treasury bills and municipal bonds are either issued by the federal or local governments to finance public works and spending.

Companies, on the other hand, issue corporate bonds to raise money on the capital markets without giving up the ownership stake that is required when issuing shares of stock. Issuing bonds also lowers the overall cost of capital because they generally require a lower rate of return than stocks. This is because they are less risky.

Corporate bonds are considered less risky than stocks because in the event of a bankruptcy, the company is legally required to pay back their loans before compensating others, including holders of preferred and common stock. As a result, some of the risk of owning bonds is mitigated by the legal priority of repayment.

Allocating a portion of your investment portfolio to bonds is a good way to diversify and to lower your overall risk exposure. Generally, as investors age it is recommended to allocate a larger portion of their portfolio to bonds and to less risky investments.

In the following articles from Investment U, we cover the basics of what bonds are and how to invest in them as well as the latest news on government bonds like treasuries and municipal bonds, corporate bonds, and more.