It's time now for our monthly financial planning segment. Karissa McDonough from People's United Bank appeared on the Channel 3 Morning News with some tips.
What Are Bonds?
A bond is a debt security, similar to an I.O.U. When you purchase a bond, you are lending money to a government, municipality, corporation, federal agency or other entity known as an issuer.* In return for that money, the issuer provides you with a bond in which it promises to pay a specified rate of interest during the life of the bond and to repay the face value of the bond (the principal) when it matures, or comes due.
Bond investments have historically been more stable than their stock counterparts. Because bonds generally may not move in tandem with stock investments, they help provide diversification in an investor's portfolio. A well-diversified portfolio is intended to reduce overall portfolio risk.
Typically, bonds pay interest semiannually, which means they can provide a predictable income stream. Many people invest in bonds for that expected interest income and also to preserve their capital investment.
As a general rule, the bond market, and the overall economy benefit from steady, sustainable growth rates. Such moderate economic growth benefits the financial strength of governments, municipalities and corporate issuers which, in turn, strengthens the credit of those bonds you may hold.
All bonds involve market risk, interest-rate risk, and inflation risk. Some bonds also present credit risk.
What are the major risks faced by bond investors?
What are the benefits of investing in bonds?