Bonds – also known as fixed income instruments – are used by governments or companies to raise money by borrowing from investors. Bonds are typically issued to raise funds for specific projects. In return, the bond issuer promises to pay back the investment, with interest, over a certain period of time.
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What is a Bond?
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What are the benefits of bonds?
- Capital preservation: Capital preservation means protecting the absolute value of your investment via assets that promise return of principal. Because bonds typically carry less risk than stocks, these assets can be a good choice for investors with less time to recoup losses.
- Income generation: Bonds provide a fixed amount of income at regular intervals in the form of coupon payments.
- Diversification: Investing in a balance of stocks, bonds and other asset classes can help you build a portfolio that seeks returns but is resilient through all market environments. Stocks and bonds typically have an inverse relationship, meaning that when the stock market is down, bonds become more appealing.
- Risk management: Fixed income is broadly understood to carry lower risk than stocks. This is because fixed income assets are generally less sensitive to macroeconomic risks, such as economic downturns and geopolitical events.
- Invest in a community: Municipal bonds allow you to give back to a community. While these bonds may not provide the higher yield of a corporate bond, they often are used to help build a hospital or school or that can improve the standard of living for many people.
Asset allocation stabilities your risk and reward by allocating your assets
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Financial instrument that holds some type of monetary value
Getting the shares of a private corporation to the public in a new stock issuance
Importance of Bonds
Bonds can contribute an element of stability to almost any diversified portfolio – they are a safe and conservative investment. They provide a predictable stream of income when stocks perform poorly, and they are a great savings vehicle for when you don’t want to put your money at risk. Bonds are largely regarded as being lower-risk investments than shares, which is why they’re so popular with big institutions such as pension funds and central banks. Huge numbers of bonds have been issued, which means that bond markets are extremely liquid (lots of buyers, sellers and securities), deep and global. Bonds are also hugely popular with hedge funds because trading costs are low and transparency high.
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