What is a bond?

Bonds are used as a “core” investment to build the foundation of a balanced portfolio. This is because they offer a wide range of maturities, interest payment terms and credit quality ratings selected to fit most portfolio needs.

When you invest in a stock, you become a part owner of a corporation. Your equity holding has unlimited upside potential and downside risk.

A bond investor is not an owner but a creditor of the underlying company or government entity.

In effect, you are lending money to a company or government (the “issuer”) when you purchase a bond.

It is the obligation of the issuer to pay its bondholders periodic interest at a fixed rate (the “coupon”), and to repay the amount of the loan (the “principal”) at a specified time in the future (the “maturity date”).

Because bonds are debt obligations of the issuer, bondholders have a senior claim over stockholders on a company’s assets, should they be liquidated.