Guide to Fixed Income Investments: What Are Bonds and CDs?

Lower interest rates on bonds mean lower costs for things you buy on credit. Investors buy bonds because they provide a safe, predictable income stream and can balance the risks posed by volatile but higher-yielding stocks and other, riskier portfolio assets. Investors also purchase bonds to earn interest on a regular basis until their original capital is returned.

See what bonds can do for your portfolio and learn about possible risks.

In exchange for lending money, investors are paid interest on bonds, similarly to how loan providers or credit card issuers charge consumers interest when they lend us money. Bond credit ratings help you understand the default risk involved with your bond investments. They also suggest the likelihood that the issuer will be able to reliably pay investors the bond’s coupon rate. A bond issuer’s overall credit quality considerably influences bond prices during and after issuance. Initially, companies with lower credit quality will have to offer higher coupon payments to compensate for higher default risk.

Government Bonds

In addition to these main categories of bonds, there are also some more niche types of bonds or similar fixed-income instruments, though these are often reserved for more advanced investors. For example, mortgage-backed securities repackage homeowners’ mortgages into bond-like investable instruments. A junk bond comes with a credit rating of “BB” or lower and offers a high yield due to the increased risk of company default. A bond is a security that denotes the debt owed by the issuer to the bondholders. The former is liable to pay the regular coupon (an interest) and repay the actual amount in the future. These are negotiable securities and earn interest monthly, quarterly, half-yearly, or even annually.

Different types of bonds by the issuer

Investors usually pay par when they buy a bond from the issuer, unless it’s a zero-coupon bond, which we cover more below. If investors buy the bond from someone else (meaning they buy it on a secondary market), they may pay more or less than face value. Check out our guide on bond prices, rates, and yields for more on how bond rates change over time. Corporate bonds are fixed-income securities issued by corporations to finance operations or expansions. Private or institutional investors who buy these bonds choose to lend funds to the company in exchange for interest payments (the bond coupon) and the return of the principal at the end of maturity.

What Is the Relationship Between a Bond’s Price and Interest Rates?

They’re generally safe because the issuer has the ability to raise money through taxes—but they’re not as safe as U.S. government bonds, and it is possible for the issuer to default. Bonds, also called fixed income instruments, are certificates of debt sold to investors to raise capital. Bonds pay a fixed interest payment on top of repayment of the principal upon maturity. Bonds and bond portfolios will rise or fall in value as interest rates change. Instead, duration describes how much a bond’s price will rise or fall with a change in interest rates. Generally speaking, the higher a bond’s rating, the lower the coupon needs to be because of lower risk of default by the issuer.

While less common, some bonds can be redeemed early if the issuer chooses to exercise their call option. This could affect your investment strategy, such as if your bonds are redeemed at a time when interest rates are down. Be sure to confirm whether any bonds you invest in are callable to assess whether you want to take on this risk. Bonds generally have a lower risk of losing principal than stocks. If you hold your bond until maturity, then generally you’ll get your full principal back, plus interest, whereas with stocks you might lose money.

Because the interest payment is semiannual, it will amount to $12.50 every six months. If all goes well, at the end of 10 years, the original $1,000 will be returned, and the bond will cease to exist. Since Inception returns are provided for funds with less than 10 years of history and are as of the fund’s inception date. 10 year returns are provided for funds with greater than 10 years of history. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. For information pertaining to the registration status of 11 Financial, please contact the state securities bonds meaning in finance regulators for those states in which 11 Financial maintains a registration filing.

1. The company pays the interest at predetermined intervals (usually annually or semiannually) and returns the principal on the maturity date, ending the loan.
2. Government bonds are often used to finance government programs when there’s a federal budget deficit.
3. The greater the time to maturity, the greater the interest rate risk an investor bears, because it is harder to predict market developments further into the future.
4. The issuer of a fixed-rate bond promises to pay a coupon based on the face value of the bond.
5. Most of them offer a fixed interest rate at regular intervals, i.e., monthly, quarterly, semi-annually, or annually.

Those interest payments are often divided into two payments per year, also known as semiannual payments, which in this case would mean receiving $25 every six months. You can buy federal bonds on TreasuryDirect, but that’s not the only way to buy them, and those aren’t the only types of bonds you can buy. A brokerage account will give you access to the widest selection of bonds, including corporate and municipal bonds, as well as exchange-traded funds (ETFs) and mutual funds that contain bonds. You can buy and sell them as often as you’d like on the secondary market.

Ensuring you understand these vital features can significantly help you make informed decisions and align your bond investments with your overall financial goals. Bonds are fixed-income securities and are one of the main asset classes for individual investors, along with equities and cash equivalents. The borrower issues a bond that includes the terms of the loan, interest payments that will be made, and the maturity date the bond principal must be paid back. The interest payment is part of the return that bondholders earn for loaning their funds to the issuer. The interest rate that determines the payment is called the coupon rate.