A bond is yet another type of security. In this case, you lend money to the bond issuer (such as the U.S. government, a municipality, or even a private corporation) for a fixed amount of time. The bond issuer agrees to pay you a fixed interest rate for as long as the bond exists and to repay the full value, known as “face value,” after that period – called bond maturity.
Bonds are widely popular for two main reasons. First, they are one of the few investments that can provide predictable income. Secondly, they provide stability to a diversified portfolio, which usually also has fragile stocks.
Whether private or public, bonds will always be a legitimate and rational investment. Companies will look for seed money for new investments or when financing debts. U.S. government bonds (and other public ones) will always be needed to build more schools, hospitals, and roads. There are several types of bonds, some of which are:
- Treasury bonds: The U.S. Department of Treasury issues them under the full faith of the Federal Government, making them some of the safest securities in the market. Maturity is usually 30 years.
- Treasury notes are also known as 10-year bonds because that is when they mature.
- Treasury bills: Gain maturity in the short-term (from a few days to one full year)
- Corporate bonds: These bonds come from private or public corporations.
- Municipal bonds come from states, cities and counties.
- High-Yield bonds offer high interest rates, but they are also risky as an investment.