What Are Bonds?

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What is actually a bond and how it is different from stock? Stocks represent ownership of a company, bonds represent the debt of a company. Bonds can be issued by a company, municipality, state or federal agency, the Federal Government. Bonds also trade publicly and can be bought or sold on various exchanges through brokerage accounts or directly through government programs.

Buying a bond means that in return for loaning money for a specified period of time, the lender receives interest. Generally, the greater the risk an investor is willing to assume, the greater / higher the interest rate. Bonds are rated by rating agencies. The higher the quality, the lower the interest rate.

Why invest in bonds? Stocks are usually considered riskier than bonds. As one enters retirement, stocks are often replaced by bonds. Interest is paid that can be used as income. Interest payments are different than dividends.

Bonds can also have default risk. When a bond is issued, there is a risk that the issuer will not be able to pay the amount borrowed back to the lender. There is also a risk that interest payments may not be able to be made. The greater the risk of default, the higher the interest rate will be.