In layman term, a bond represents a loan from an investor to a borrower such as governmental or a company. That company uses the money in form of bonds for its operations and the investors would receive a fixed-income since bonds traditionally paid a fixed interest rate (coupon) to debt holders.
Is it a good investment?
If you invest in Bonds strategically along with stocks and different other assets, it may be a great addition to your investment portfolio.
No doubt that stocks can earn more interest, but they always have more risk. You can invest in bonds anytime in your lifespan but you may consider it if you are near to your retirement as you do not want to take much risk and less sleepy nights by investing shares which has very high volatility.
one more reason to invest in bonds is to have tax breaks. Although not all bonds are tax free but some kinds are tax breaks such as municipal bonds(these bonds are issued buy governments. Most of the municipal bonds are tax free).
Disadvantages of bonds:
Yes, bonds are safer than the stocks but they still carry some risks. what if the company (borrowe) would go bankrupt, they wont be able to payoff the debt.
bond yields can fall over time.
Things need to consider while invest in bonds.
- Tenure of the bonds
- YTM (Yield to maturity)
- Liquidity
- coupon rate
- credibility
PRO TIP: you should consider all the aspect but for safer investment, do pay attention on credibility that means the rating of the bond and YTM (higher the YTM better to invest in that bond).