Ban Introduction to Bonds

To make it simple, bonds are loans given by the lenders to the government or corporations. Bonds are legal contracts between the debtor (government, municipalities, agencies and corporations) and the lenders, also known as the issuers. Just like loans, the debtor promises to pay the lender within a specified time frame and with the interest accrued to the loan.

The difference of bonds from stocks is that owning a bond will not make the issuer a partial owner of the company. Bond issuers only make themselves a creditor to the company or the government. Bonds are considered as fixed-income securities because a specific amount of payment and interest rate will be received for a determined period of time.

Many investors, in order to diversify their portfolios invest in a combination of bonds, cash and equities. Some who prefer stability of their investments prefer to invest more in bonds because compared with stocks, bonds are more dependable and the principal is more likely to be returned at the specified interest rate.

Bonds may also increase the value of a person's portfolio. Because bonds are fixed income investments, the person investing in bonds may expect capital gain over a long period of time. Another advantage of investing in bonds is that when a person invests in US Treasury Bonds, he or she may be able to decrease his or her tax burden.

For persons who invest in bonds, they may earn their capital gains even in periods when there are declining interest rates.