Investor's Manual: What Is a Bond?

Understanding the basics of bonds. This is a brief bonds 101 article defining what is a bond.

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Bonds are a type of fixed-income security in which an issuer (or borrower) is required to make periodic payments of a specific amount, or specific rate, at regular intervals.

Government entities, from the U.S. Treasury down to state and local municipalities, need to raise money—whether for specific projects or simply to fund basic services. Corporations also often choose debt to finance acquisitions, upgrade plants or technology, and other things. So they issue bonds. Bonds are typically made up of three components:

Principal is the face value of the bond, or the amount an investor initially pays to purchase it. It’s often set at $100 or $1,000 per bond. The principal is also sometimes referred to as “par.”

Maturity is the date on which the money loaned—the principal—needs to be paid back. For example, a U.S. Treasury bond has a 30-year maturity.

Interest rate is the annual amount, expressed as a percentage, that the bond issuer must pay the purchaser over the life of the bond. This also known as the “coupon” and is where the term “sitting at home clipping coupons” came from.

Bonds tend to be viewed as a more stable and predictable form of investing compared to the stock market. Bonds may help you ride out the volatility that the stock markets tend to offer, no matter which direction they might be headed.

Like stocks, bonds can run in cycles, but they’re typically less volatile. Bonds sometimes outperform stocks when a bear market hits,potentially providing a measure of diversification for investors who are attempting to put together more balanced portfolios. And like stocks, they do carry an element of risk, so investors should carefully research a bond and its risk before investing.

Learn more about how bonds work here.

Time to Hit the Market?

Bonds can be an integral part of an investment portfolio, but for those who are still not sure where to start,TD Ameritrade clients can use the TD Ameritrade Bond Wizard to walk through the process of discovering bonds that meet unique criteria.

Watch this video to learn more about bonds.

Investing Basics: Bonds
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Investments in fixed income products are subject to liquidity (or market) risk, interest rate risk (bonds ordinarily decline in price when interest rates rise and rise in price when interest rates fall), financial (or credit) risk, inflation (or purchasing power) risk and special tax liabilities. May be worth less than the original cost upon redemption.
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