“If you give someone money to purchase a house, that loan is called a mortgage. If you loan money to the U.S. Government, utility companies, or even your local village, that loan typically takes the form of a bond issue.”
– Ilyce R. Glink, author of
100 Questions You Should Ask About Your Personal Finances
A bond is essentially a loan to the government or corporation on which you earn interest, and the issuer promises to pay you back in full by a certain date–known as the date of maturity. Government bonds offer the greatest degree of Freedom, as they are backed by the “full faith and credit” of the U.S. Government. It’s highly unlikely that the U.S. Government will default on repayment of this loan. If it does, you should be worried about more than the loss of a single bond.
Bonds are generally referred to as “fixed-income investments” because they make regular interest payments up until the date of maturity. The longer a bond’s maturity, the more its price will be affected by fluctuating interest rates. To compensate for the greater price risk, long-term bonds generally offer higher interest rates than intermediate or short-term bonds.
Over time, bonds have generally proven to provide higher returns than cash investments and to perform ahead of inflation.