What Is a Bond?

Bonds allow an individual to become a lender instead of a borrower. They are essentially like an ordinary loan, an interest only loan. You receive the agreed upon interest rate during the lifetime of the bond and the face value of the bond upon maturity.

There are many types of bonds. Some are backed by mortgages. Some are backed by securities. Many are backed by various levels of government (municipal, state, or federal). They are regularly offered by corporations and government as a means of raising money, often for capital needs.

Some are safer than others. Some offer higher rates of return than others. Even within any particular sector, say municipal bonds, there are different levels of risk (identified by credit ratings).

While about a third of all bonds are purchased by insurance companies and mutual funds, about 10-15% are owned by individuals. Pensions funds, financial institutions and others own the balance.

It is common practice for investment advisors to divide investments into three categories, stocks, bonds and cash. Generally a “balanced” investment program is recommended.

• Cash is seen as money being held in reserve, ready to invest at the appropriate time.
• Stocks are seen as the more speculative investment but the one offering the greatest long term growth.
• Bonds, especially government bonds, are seen as the more conservative investment and are usually recommended for older investors who may need their money for more immediate needs.

The Securities Industry and Financial Markets Association has a site called Investing in Bonds that has a great deal of helpful information about bonds. For further information you might want to check it out.

If you want to learn more about US government savings bonds (generally considered the most secure investment available) you might want to check out TreasureryDirect. You can set up an account and buy bonds directly from the government online as well as learn more about the variety of government bonds available.