Bonds are sometimes described as debt securities and sometimes as fixed-income investments. If you understand what each of these terms means, you understand how bonds work. When you buy a bond, you’re actually lending the issuer money that you expect to get back. That’s the debt. The issuer pays interest for the use of your money, typically on a set schedule. That’s the fixed income.
People often think of bonds as a more conservative investment than stock. It is true that you can buy them at issue and hold them until maturity, so that what is happening to bond prices in the marketplace doesn’t affect you. But changing demand does affect the price, so you can also trade bonds to realize capital gains from selling for more than you paid to buy them.
You can create a diversified portfolio by purchasing bonds of different terms, from different issuers, and with a range of ratings.
From AAA-rated municipals to high-yield corporates, from bonds with maturities of a month to those with maturities of 100 years, from zero-coupon convertibles to mortgage-backed bonds, there’s more variety among bonds than you might think.
Yield curve — or the relationship between the interest rates of short- and long-term bonds of equivalent investment quality — is a useful measurement to help you manage your fixed-income porfolio.
Related topics
YieldYield measures your investment income in terms of the price you paid.
