What are Bonds?

Close up of US currency showing the Capitol

We mentioned before about how larger real estate investors will probably get out of actual real estate ownership because of higher borrowing costs. In today’s post, we’re talking about bonds.

It’s not unusual for investors to switch asset classes depending on their goals and the economic climate. Some investors will switch early, when they believe there will be a downturn in the market.

Bonds will tend to do better when the economy is bad, and not as well when the economy is good. Why? Because other asset classes offer a larger return on their investment.

So, what are bonds? Bonds are debt securities that are issued by governments and corporations to raise capital.

They pay a fixed rate of interest to bondholders and return the principal when the bond matures. Because the interest rate on bonds is fixed, they can be a good investment option for investors who are seeking a predictable stream of income.

There are a few potential benefits to investing in bonds:

1. Income: Bonds can provide a steady stream of income in the form of interest payments.

2. Diversification: Adding bonds to a portfolio can help to diversify the portfolio and reduce overall risk.

3. Safety: Because bonds are issued by governments and corporations, they are generally considered to be relatively safe investments.

Be aware though, that bonds are not entirely risk free. They are generally more conservative investments than many other asset classes, but there are situations where bonds can be an investment loss.

For example,  if interest rates rise, existing bond holders could lose money. Higher interest rates mean bond returns decline, resulting in losses. Or, if the issuer of a bond defaults on its payments, bondholders may not get anything back on their investment.

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