Smart Bond Investing

Bond Basics


What's a Bond?

Bond Fact

Investors held more than $2.7 trillion in taxable and municipal bond funds as of May 2011.

Source: Investment Company Institute

A bond is a loan that an investor makes to a corporation, government, federal agency or other organization. Consequently, bonds are sometimes referred to as debt securities. Since bond issuers know you aren't going to lend your hard-earned money without compensation, the issuer of the bond (the borrower) enters into a legal agreement to pay you (the bondholder) interest.

The bond issuer also agrees to repay you the original sum loaned at the bond's maturity date, though certain conditions, such as a bond being called, may cause repayment to be made earlier. The vast majority of bonds have a set maturity date—a specific date when the bond must be paid back at its face value, called par value. Bonds are called fixed-income securities because many pay you interest based on a regular, predetermined interest rate—also called a coupon rate—that is set when the bond is issued.

Understanding bond basics is critical to making informed investment decisions about this investment category. The more you know now, the less likely you will be to make a decision you later regret.

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