In plain words: Loans to governments or companies that pay you interest.
A bond is essentially a loan: you lend money to a government or company, and in return they agree to pay interest over a set period and return the principal at the end. As an asset class, bonds are often described as the steadier, income-oriented part of a portfolio, sitting between higher-growth equities and very stable cash.
How do bonds behave differently from shares?
Because the interest payments are agreed in advance, bonds tend to be less volatile than shares in companies. This relative steadiness is why a balanced profile might pair the two, using bonds to cushion some of the swings that equities can bring. They are not risk-free, though — prices still move with interest rates and the borrower's reliability.
Why hold bonds in a portfolio?
Bonds can provide a more predictable stream of income and help smooth the overall ride. A more cautious profile often holds a larger share of this asset class. To explore how they fit, you can take a closer look at bonds.
Key takeaways
- A bond is a loan to a government or company that pays interest.
- Bonds are generally steadier than equities but not risk-free.
- They often serve to cushion a portfolio and provide income.