Bonds

The main types of bonds to invest in include government bonds, corporate bonds, municipal bonds, and high-yield bonds. Government bonds like treasuries, are backed by the government and are considered low-risk investments. Corporate bonds are issued by companies and offer higher yields but come with higher risk. Municipal bonds are issued by state and local governments to fund public projects and often provide tax advantages. High-yield bonds, also known as junk bonds, provide higher yields but carry a greater risk of default.

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Yes, bonds are considered to be fixed income investments.  When you invest in bonds, you're essentially lending money to the bond issuer, whether it's a government or a corporation. In return, the bond issuer promises to make regular interest payments, typically at fixed intervals, until the bond reaches its maturity date. This structure gives you a predictable and steady stream of income. Plus, the original amount you invested is also returned to you when the bond matures.

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According to the U.S. Securities and Exchange Commission (SEC), the average annual return on bonds is about 5%.¹ Because bonds often come with less risk than equities (stocks), they typically have lower average returns, but they're considered a more stable investment. Bonds are not a risk-free investment, however. There's the chance you won't get paid back (credit risk or default risk); the possibility of a decline in the bond market (market risk); the chance interest rates will rise, causing your lower-rate bond to be less appealing to a potential buyer prior to maturity (interest rate risk); and the chance that your bond won't keep pace with inflation (inflation risk).

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If you buy a bond, you sit back and collect the interest payments while waiting for the bond to reach maturity (the date the issuer has agreed to pay back the bond's face value).

However, you can also buy and sell bonds on the secondary market before the maturity date. After bonds are initially issued, their price can fluctuate. If you hold them to maturity the fluctuations generally won't matter since the face value to be paid at maturity won't change and the interest collected along the way will be stable.

But if you want to buy or sell a bond, keep in mind that the price you'll pay or receive is no longer the face value of the bond. The bond's susceptibility to changes in value is an important consideration when choosing your bonds.

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One of the main benefits of investing in bonds is the potential for regular income through fixed interest payments. Bonds are generally considered less volatile than stocks, making them a more stable investment option. However, bonds aren't without risks. For example, when market interest rates rise, the value of existing bonds will decrease. There's also credit risk when the issuer is unable to make interest payments or repay the principal. Additionally, inflation risk can erode the purchasing power of fixed interest payments over time. Assessing these risks and benefits is important for investors when considering bond investments.

Talk to a financial advisor about which bonds might be right for your goals.