Although stocks seem to get all the attention on the news, another type of investment, called a bond, is important too.
So What is a Bond?
A bond is like a loan between two parties. Typically, this loan is between a person (you or me) and a company or government. When you buy a bond, you’re loaning money to a company who will pay you back what you loaned plus interest. Bonds typically last 3-30 years, depending on who issues them.
What’s So Great About Bonds?
Bonds are known to be much safer than stock. Bonds are all but guaranteed to be paid back, especially if you own one from a stable government or company.
How Do I Buy One?
Bonds are sold through the same brokerages listed in the previous post. For United States bonds, you can purchase them through TreasuryDirect. There, everything is handled electronically and you don’t have to receive an actual piece of paper representing the bond.
How Do Bonds Make Me Money?
Bonds make you money in the same way a bank or credit card company makes money: through interest. Most bonds pay out interest twice a year. How much you receive will depend on the bond’s interest rate and the value of the bond.
Also, once the bond matures (meaning it’s full value is reached), you can cash it in, getting the original amount of money you paid back.
What’s Not So Great About Bonds
Bonds don’t return as much money as stocks typically do. There’s also always the chance that a company will go bankrupt and won’t be able to pay back the bond. Although bond holders get payment before stockholders if this were to happen. I don’t worry about U.S. government bonds not being repaid since if the United States is ever in the situation of not being able to pay me back, I think we’ll have much bigger problems to worry about.
Overall
While bonds are considered “safe” investments and provide a predictable return, you pay a price for this decreased risk: less money. Holding bonds is fine at any age of course, but it’s definitely wise for those middle aged or nearing retirement to transition from stocks to bonds.
