What is a Bond?

Bonds are an interesting way of investing your money. For starters, they are actually a form of debt. A bond is a loan you give to another institution, city, or government, in a sense serving as the bank. While it might be strange to think of yourself acting as a bank for larger institutions and interests, professional investors recommend this sort of investment to balance out your portfolio with more stable endeavors.

How it works is that a city might be raising funds for a project that they don't have all the necessary capital for but social interest dictates an immediate solution. This might be a new bridge or other large-scale municipal project. On a grander scale, the federal government has issued bonds to help finance their debt. They sell shares in monetary sums and the lenders, which is you, buy them under the premise that the government pays you back regularly with interest.

Because bonds are so stable and earn a regular income off the original amount, they are highly recommended by investors. When the stock market is too risky of a gamble for your money, bonds typically offer a safer investment. Ideally, anyone can benefit from investing in bonds if they have the money to do so. Younger investors and those wanting to protect future from certain risks are advised to include a portion of bonds in their portfolio along with stocks. The percentage of your portfolio dedicated to bonds is usually less than 15% although depending on certain criteria, such as your age and goals, might change this. However, it's never advised to devote more than this percentage to bonds.

When it comes to investing the rules are built around a certain inherent risk factor. While bonds are relatively safe bets, before calling your broker make sure you understand the ins and outs of the different kinds of bonds. Like with any investment, some offer more stability, and there are a few that require a leap of faith. This guide to the following types of bonds is a good place to familiarize yourself with the options.

The safest bond out there is called a Treasury; it's issued by the U.S. government to help finance debts. Because of where they originate, they are considered "benchmark bonds" which means all other bonds are determined from their issue price, including ones by private companies. However, the downside to this is that you won't collect as much interest but are guaranteed to make money back. They're usually sold in shares of $1,000 and ranging anywhere from a few days to half a year in term. The money is collected when the Treasury Bills mature and you then receive the full face value as interest on the original amount. Treasury Bonds are similar except that they are issued only in 30 year terms and pay interest every six months. These options are considered "virtually risk-free".

Another safer bond is an Agency bond. Less of a sure bet then the Treasuries but a better option than most corporate bonds, these are also issued, in a sense, by the government. What this means is that certain companies are funded and also regulated by the government and thus a bit more trustworthy in their financial commitment to lenders.

At some time in your life you probably received a Savings bond as a gift. What happens is that anyone can purchase these at face value from the U.S. Treasury and redeem them anywhere from a year later up to 30 years after they were bought. Keep in mind that you lose interest if you cash them in before five years pass!

Two options that can be worth it but also include more risk are Municipal bonds, or Munis, and Corporate bonds. A municipal bond is issued by local governments, states, or cities to build bridges, beautify the park system, or fulfill some other community need. They are exempt by Federal and sometimes State taxes depending on where you live. There is a higher risk of the borrower defaulting in this situation, but if the bond is insured the insurance company will cover the cost.

Corporate bonds are considered the riskiest investment of the lot as there is less regulation and no protection from defaulting. These are issued by private companies with diverse interests. Only invest with a professional's advice.

Lastly, invest in any bond wisely. Interest rates impact bonds the most. Keep in mind that as rates rise, the value of your bond falls.