What are bonds?
Bonds are the largest securities market in the world yet many investors know very little about them. Bond yields drive investment in all other markets because all other returns are typically measured against an investment in ‘risk-free’ government bonds.
The main driver of an investment in bonds is capital preservation and regular, stable returns. This makes bond less exciting than other investments such as property or shares but critical nonetheless to providing a secure income and diversified risk. Bonds act as a portfolio stabiliser, providing regular returns even during times of extreme volatility or stress.
Bonds can be issued by governments or by companies or corporations and unlike equity investments, corporate bonds are secured against the assets of a company. This means that in the event of a company default, bond holders have rights over the assets of the company. In these circumstances, equity investors are the last in the queue and only receive money if there is any left over after bond holders have been paid out in full.
So it pays to know a little about what bonds are, how they are priced and where they fit in an investment portfolio. We found a great educational resource at PIMCO, one of the world’s largest bond managers, and recommend you read more about bonds here.
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