People buy bonds for three basic reasons: safety, income and diversification of their portfolio. Bonds are generally considered to be safe investments, and buyers expect to get their principal back intact. But all bonds carry some risk, with the exception of government Treasury bonds, which are considered default risk free. The investment risk depends on the financial strength of the issuer and current market conditions.
Due to the steady income that comes from a bond’s interest payments, they’re called fixed-income securities. The income is set at time of issue and remains the same, which makes them good investments for planning and budgeting. Purchasing bonds is also a good way to balance out the cash segment of a portfolio. And interest rates can be higher than money-market funds or CDs, making them attractive to investors.
Just like with stocks, you don’t have to purchase individual bonds, but can buy a variety through an index or exchange-traded fund, limiting your risk and increasing your diversification. For more information on the role bonds play in a diversified portfolio, visit our website or give us a call today.
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