Bonds are typically loans made by an investor to a borrower. These include corporations, cities, and national governments. An individual bond certificate is a piece of a massive loan. That’s because the size of these entities requires them to borrow money from more than one source. Bonds are a type of fixed-income investment.

Types of Bonds

There are many different types of bonds. They vary according to who issues them, length until maturity, interest rate, and risk.

The Government and state govt bonds are safe and liquid. Corporate bonds are issued by companies. They have more risk than government bonds because corporations can’t raise taxes to pay for the bonds. The risk and return depend on how credit-worthy the company is. Normally the highest paying and highest risk ones are called junk bonds.

Advantages of Bonds

• Regular Income
• Profit on Resale

Disadvantages

Over the long haul, bonds pay out a lower return on investment than stocks. Investors may not earn enough to outpace inflation. Investing only in bonds might not enable one to save enough for retirement.

Risk of investing in Bonds

• Credit Risk
• Inflation Risk
• Reinvestment Risk
• Liquidity Risk