Bonds

Revised by Ricardo Ribeiro

Buying bonds is like lending money to a company or the government. You get the promise to receive your money back plus interest at a future date.

Government bonds normally pay less interest because there are fewer risks involved. Nothing is guaranteed, but chances are the government will pay you back without problems.

Corporate bonds are riskier than government bonds. Companies do not pay their debt sometimes. In turn, corporate bonds pay more interest to compensate for the higher risk.

There is a particular type of corporate bonds, called Junk Bonds, that are bonds issued by companies in financial difficulties. The interest they pay is a lot higher, but the risk of not getting your money back is a lot higher too.

Individual investors are better off by investing in bonds through an investment vehicle. You would need a lot of money to buy bonds directly. Besides, a fund offers greater diversification.

Bonds are also somewhat ignored by beginner investors. That is also a mistake, since bonds provide a great way to add stability and diversification to a portfolio.

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