When investing in bonds, you need to understand the different risks involved. Bonds should pay back the original principal at maturity. This is why they are popular with investors who don’t want to risk losing their capital but still need to meet financial obligations in the future. They also tend to pay higher interest rates than short-term savings accounts.
One of the biggest risks in bond investing is inflation. Bond prices are negatively correlated with inflation, so the higher the inflation, the lower the real value of the coupon. Too high inflation, however, can cause bond prices to fall dramatically, and investors may be forced to seek alternative investments. If this happens, they may be better off in a riskier asset class, such as stocks.
In general, you should consider bond investments as a part of a diversified portfolio. They can provide safety and income as well as help you diversify your portfolio and minimize risk. You can mix and match bonds with equities and municipal bonds. In addition, you can ladder bonds so that they mature every year, giving you access to cash when they do. It’s important to research your options and choose wisely.
Bonds are issued by corporations and governments. The issuers then use the money raised through these loans to carry out various purposes. The principal and interest are repaid at maturity, and the proceeds are used for various purposes. As a result, bonds are much less risky than market-linked investments like equities.