Depending on your financial goals, time horizon, and risk tolerance, investing in bonds (debt securities) can play a key role in diversifying your portfolio.
What is a bond?
When corporations, municipalities, governments, and other entities need funding for their major projects, they raise money by issuing bonds to the general public. Think of a bond as an IOU issued by the entity borrowing money from you. In exchange for the loan, you'll receive a specific rate of interest over a set period. When the bond comes due, you should get back the full face value.
Types of bonds
Depending on the issuer, each type of bond has a different set of risks and rewards. You can choose to invest in federal government securities (treasuries), municipal (munis) or corporate bonds, mortgage- and asset-backed securities, and foreign government bonds. All bonds work according to the same principle: interest is paid in exchange for a loan until it's repaid.
How to buy bonds
In the U.S., you can purchase government bonds through TreasuryDirect.gov. You'll need an in-person broker or online service to buy the other types of bonds; be sure to check for minimum investment requirements, commissions, and other fees before you start trading.
Bonds have three characteristics: face value, coupon, and maturity date. Duration is the fourth characteristic — it's the calculated value that helps you assess interest rate risk.