Introduction to Bonds (Part 2)

Types of Bonds

There are three main types of bonds:

• Corporate Bonds: These bonds are issued by companies to raise money, often for large projects.

• Municipal Bonds: These bonds are issued by local governments, such as states and cities.

• Treasuries: These bonds are issued by the U.S. government.

Risk

Bonds in general are considered relatively low-risk, since companies have an obligation to pay them back. However, there are two main categories of risk in bonds.

The first is investment grade. These bonds are considered to be secure, and have a low risk of defaulting. Defaulting is when the bond issuer cannot pay the bond back. Typically these will be issued by large companies and governments.

The second type is high-yield. You may also hear them called junk bonds. These are high risk, and so they have high interest rates to attract investors. They are usually issued by small companies like startups, or those that have a lot of debt already.

High-yield bonds are generally at a higher risk of defaulting. However, overall, bonds have lower risk than stocks, since stocks have no guarantee of going up and making profit. To balance this risk out, stocks usually have higher returns than bonds. You may hear the phrase “high risk, high reward”. Investments that can make a lot of money tend to have more risk to them.

Conclusion

There was a lot of information here, so don’t worry if you don’t get all of it. The important thing to note is that bonds are an important thing for any investor to know of. They are generally low-risk, and provide a steady flow of money. However, as I mentioned before, stocks, while riskier, generally outperform bonds. Therefore, you should have a good mix of both.