Bonds are also known as fixed-income or
income-producing investments because when you buy a bond,
you receive interest payments
on a regular schedule. And the bond issuer promises to
pay back your principal,
or original investment, when the bond matures.
Cautious investors, or investors approaching a major financial
goal such as retirement, may allocate more of their assets
to bonds than to stocks not only because bonds pay regular
income, but because their prices are usually less volatile than
stocks.
But that doesn't mean that bonds are invulnerable to market
changes, or that they are always risk-free investments.
Bond prices change in response to supply and demand, which
are driven by changes in interest rates. The prices of
some bonds, such as zero
coupon bonds, can be highly volatile in the secondary
markets. And high-yield
bonds, sometimes called junk bonds, can be very high-risk
investments because of the danger that the bond issuer
will default,
and fail to make its interest payments, or even fail to
pay back your principal.
But a portfolio heavily weighted in high-quality corporate
bonds, municipal bonds, and Treasurys, will almost certainly
fluctuate in value less than a portfolio that is concentrated
in stocks. The trade-off is that over the long term high-quality
bonds generally provide more modest rates
of return than stocks.
Professor
Roger Ibbotson, Yale University, chairman and founder
of Ibbotson Associates
Professor
Roger Ibbotson, Yale University, chairman and founder
of Ibbotson Associates 
