What are Bonds?

Answer:
Bonds are a type of debt security that are similar to I.O.Us.

You buy bonds from an issuer such as a municipality, government, federal agency, corporation, or other entity. When you buy a bond, you are lending the issuer money in exchange for a specified interest rate throughout the bond’s term. When the bond matures or comes due, the issuer pays you back the face value, or principal, of the bond.

Bonds are available as U.S. government securities, corporate bonds, federal agency securities, municipal bonds, foreign government bonds, and mortgage- and asset-backed securities.

Bonds are fixed-income investments since they earn a fixed amount of interest. As a bond owner, you are considered a creditor to the issuer. On the other hand, when you own stock, you are considered a partial owner of the company.

Several companies such as Moody’s, A.M Best, and Standard and Poor’s rate bonds on a scale of A-C according to their risk. A grade of A indicates a low-risk bond while a grade of C represents a risky bond.


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