The bond market is larger than the stock market, yet many individual investors are less familiar with bonds. Understanding bonds is important for building a balanced portfolio.
What Are Bonds?
A bond is a fixed-income instrument representing a loan from an investor to a borrower (typically a government or corporation). The borrower pays regular interest and returns the principal at maturity.
Types of Bonds
- Government bonds: Issued by national governments, very low risk
- Municipal bonds: Issued by states and cities, often tax-exempt
- Corporate bonds: Issued by companies, higher yield with more risk
- Treasury Inflation-Protected Securities (TIPS): Adjust for inflation
How Bonds Fit in a Portfolio
Bonds provide income, capital preservation, and portfolio diversification. They tend to be less volatile than stocks and can provide stability during market downturns.
