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 are always risk-free investments.
Bond prices change in response to supply and demand that’s
driven by changes in the 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 high-quality bonds generally
provide more modest
rates of return
over the long term than stocks.
