What are bonds and for what kind of investors are they suitable?

A bond is a debt security, issued by governments, corporations, or other entities to raise capital. When you buy a bond, you are lending money to the issuer in exchange for periodic interest payments (called coupon payments) and the return of the bond’s face value (or principal) when it matures (called the maturity date). Bonds are often referred to as “fixed-income” securities because they provide regular, predictable interest payments, typically semiannually or annually, over the life of the bond.

Bonds are rated by credit rating agencies (like Moody’s, S&P, and Fitch) based on the issuer’s creditworthiness. Ratings range from AAA (highly secure) to D (in default). Higher-rated bonds are considered safer but typically offer lower yields, while lower-rated bonds, or “junk bonds,” offer higher yields to compensate for the increased risk.

While generally considered safer than stocks, bonds still carry risks, including interest rate risk, credit risk, and inflation risk. Longer-term bonds are usually more sensitive to interest rate changes. Bonds provide steady income and are often used to balance a portfolio, particularly for more conservative investors. Government bonds are among the safest investments, while corporate bonds offer higher yields for taking on more risk.

Bonds are suitable for those investors who are approaching retirement in a few years from now that is they would not and should not lose whatever life time savings they have as the time available to recover the losses is very short. This is important even if they have higher risk-taking aptitude. Also, they should prefer to invest in investment grade bonds and not junk bonds.