How Do Bonds Work?

Bonds are the most common type of debt security. In short, bonds are an “I.O.U.” between an investor and an entity, such as private and public corporations, governments, and municipals. These bonds are issued with the intent to apply the capital (money) raised to a predefined project, such as real estate. 

Once an investor purchases a bond, they will earn fixed interest payments over the bond’s lifetime, as well as the principal payment back once its maturity date hits. Since bonds are long-term investments, typically 30-years, investors enjoy a much more stable source of income when compared to stocks, but typically not nearly as much growth as stocks. 

Government-issued bonds hold substantially less risk because they historically do not default or fail to pay interest or principal. On the contrary, corporate-issued bonds have slightly more risk and have the potential to default. Because of this, corporate bonds are given bond credit ratings to help guide investors towards bonds more aligned with their risk tolerance.

What Types of Bonds Can You Invest In?

If you like the idea of a steady and relatively low-risk investment, here are some types of bonds to consider. 

Corporate bonds: Either issued from private or public corporations.

  • Investment Grade: Bonds that have a higher credit rating, thus comes with less credit default risk.
  • High Yield: Bonds that have a lower credit rating, come with a higher credit default risk. The assumed increase in risk comes with higher returns.

Municipal bonds: Known as “muni’s,” these are bonds issued by local governments (i.e. state, city, county, etc.).

  • General Obligation: Bond that is unsecured by an asset (e.g. property), rather it is backed by optimism in the issuer, who controls taxing the residential bondholders.
  • Revenue Bonds: A bond that is backed by the revenue created from the project, such as an indoor community center, or toll bridge.

Government Bonds: The safest type of bond, as it relies on the full faith and credit of the U.S. Government. These are issued by the U.S. Department of Treasury. The main differentiator between these are their maturity dates. 

  • Treasury Bills: 52 weeks to maturity.
  • Notes: 10 years to maturity.
  • Bonds: 30 years to maturity with biannual interest payments.

Treasury Inflation Protected Securities (“TIPS”): Interest rate adjusts with the Consumer Price Index

  • Biannual interest payments and maturity dates range from 5, 10, and 30 years.

Bond ETFs: These are a group of bonds that have been carefully selected to perform and grow together so investors can collect dividends. 

  • Low volatility funds with steady interest earned on your investment. 

Who Should Invest in Bonds?

Bonds can act as a crucial player in your portfolio’s game, especially when defending your portfolio against the risks associated with stocks. For conservative investors, bonds are a fantastic investment to consider for consistent returns. 

Bonds can also be a place to keep your long-term savings. Most of the time you will see a higher return on your investment with bonds than you would keeping your money in a basic savings account. 

Interested in Adding Bonds to Your Portfolio?

Many people have heard of or received bonds from older relatives but might not be aware of how they work or how you can turn a profit on them. If you have paper bonds, you can exchange them for cash, add them to your bank account, or re-invest your money. 

If you are interested in investing in bonds, your next step is to purchase some. This can all be done for you with a fully managed account from MoneyLion, particularly with our more Conservative portfolios and our SteadyIncome portfolio. Both of these portfolio types rely on bond ETFs to help keep your money safe and stable while still seeing steady returns annually. In fact, all MoneyLion portfolios are stabilized by holding some percentage of bond ETFs, except for our most aggressive Equity Only portfolio.

You do not have to research bonds or manage your investments, your MoneyLion investment account does all of this for you. Open an account, set up Auto Invest and help your money grow!

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