Decoding Bond Investments

Bonds are an effective way to diversify a portfolio and generate income, but they do carry certain risks. These risks include interest rate risk – in which bond prices generally decrease if interest rates rise – and credit risk.

Bonds are loans issued by governments or companies at an agreed-upon interest rate until maturity, when your investment will be returned in full.

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Bonds are investments issued by governments or companies to raise money, offering regular interest payments until maturity, when investors will receive back their principal investment back. Credit agencies rate bonds according to quality and risk; government backed bonds generally carry no default risk while corporate or international ones may carry greater risks with higher yields.

Bonds can be taxed as regular income unless held within an IRA account; however, bonds provide many advantages as part of a diversified investment portfolio. They provide steady streams of income with lower volatility than stocks while offsetting the risks associated with them.


bonds provide both income and reduce portfolio volatility, making them a key component of many portfolios, particularly among those nearing or already in retirement. Bonds offer predictability over volatile stocks and make an attractive part of retirement portfolios.

When purchasing bonds, you are lending money to their issuer with the expectation that they will repay both your initial investment, known as its face value, as well as provide interest payments over time. The length of time until maturity (when your face value will be returned to you) is known as its maturity date – long maturity dates tend to be more sensitive to changes in interest rates.

Some bonds are linked to inflation rates and can rise or fall with inflation rates; these are known as inflation-linked bonds. Some may even be callable by their issuer, which could influence your overall return.


Bonds can help a portfolio balance risk and volatility, yet the bond market can be daunting to many investors. Bonds serve as debt instruments between an investor and issuer (such as government, municipality or corporation), who promises to pay an interest rate during its life before returning principal (also called face value) at maturity.

Investors can purchase individual bonds directly from issuers, or mutual funds that offer bonds, depending on their goals, time horizon and risk tolerance. Your choice of bond should depend on these factors as well as interest rate risk, credit risk and inflation risk exposure – diversification cannot ensure profit or protect against losses in declining markets1. 1


Bonds provide a steady source of interest payments prior to maturity that could potentially be tax-free depending on your investment type and federal and state taxes.

Studies on bond issuers should include research of their background. Bonds with lower credit ratings could signal increased risks. You should also take your personal risk tolerance into consideration, since bonds with lower ratings generally offer higher yields to make up for increased risks.

Diversifying your bond portfolio can help mitigate risks associated with sudden increases in interest rates that cause their prices to plummet. Furthermore, using a broker who specializes in bond trading and has in-depth knowledge of the bond market such as FINRA BrokerCheck can be useful when opening accounts.

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