What are Bonds?
A bond is a debt security, by which you are lending money to a government, municipality, corporation, federal agency or other entity known as issuer. In return for investing in bond, issuer promises to pay you a specified rate of interest during life of bond and to repay face value of bond (the principal) when it becomes due.
Why Invest in Bonds?
It is always prudent for an investor to maintain a diversified investment portfolio consisting of bonds, stocks and cash in varying percentages, depending upon individual circumstances and objectives. Bonds help you to diversify your portfolio, thereby, reducing your risk exposure.
Investing in bonds provides a predictable stream of income and repayment of principal.
Bonds maturing within three to five years will hold on to value that they are worth. They offer some protection against stocks related losses in a portfolio.