The beauty of bonds is they can give you certainty. In an uncertain world, one should not underestimate the value of certainty.
When you invest in bonds you are lending money to companies or governments. So bonds represent debt. In contrast, stocks represent equity ownership.
Generally, investing in debit is safer than investing in equity. This is because if a company goes bankrupt, debtholders (creditors), are paid ahead of shareholders.
Depending on the value of the assets liquidated by the bankrupt company, in a worst-case scenario, creditors might get some of their money back while shareholders might lose their entire investment.
Bonds are sometimes called fixed-income investments. This is because their repayments were traditionally fixed.
Nowadays, you can get bonds with a variable interest rate as well as bonds with a fixed rate.
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The bond market offers many choices, so it’s important to have a clear picture of your goals before you begin selecting individual bonds to invest in.
UK government bonds are commonly called gilts. They are placed between shares and cash in terms of risk.
If you want higher returns than a bank account, then government bonds represent a better investment. However, if you want a still-higher yield and are willing to take on higher risks, you may want to take a look at high-yield bonds (also known as “junk” bonds).
Traditional interest-bearing bonds pay interest on a regular basis, typically semi-annually, quarterly, or monthly. The payments on these bonds are fixed, which means the amount you receive with each payment generally remains the same.
Though bonds are often used for their ability to generate income, it is also possible for them to turn into growth investments. This happens when interest rates drop below the interest rate the bond is receiving, which makes it an appealing investment for other investors and allows the investor holding the bond to sell the bond at a premium.
Investing in fixed-income securities involves certain risks, such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed-income investments may be worth less than original cost upon redemption or maturity.