A bond is a debt security, similar to an I.O.U. You are lending money to a government, municipality, corporation, federal agency or other entity known as an issuer. The issuer provides you with a bond in which it promises to pay a specified rate of interest during the life of the bond and to repay the face value of the bond (the principal) when it matures, or comes due. Bonds can be also called bills, notes, debt securities, or debt obligations.
When companies need to raise money, issuing bonds is one way to do it. A bond functions as a loan between an investor and a corporation. The investor agrees to give the corporation a specific amount of money for a specific period of time in exchange for periodic interest payments at designated intervals. When the loan reaches its maturity, the investor’s loan is repaid.
Bonds or fixed income investments are typically a core investment allocation for our clients. The “minimum” time period we recommend for investing in bonds varies but generally ranges from one to three years.