Bonds is an asset class where the investor lends a government or business money for a set period of time, with the promise of repayment of that money plus interest. Bonds are commonly referred to as fixed-income securities and are among the three main asset classes, along with stocks and cash equivalents. Unlike stocks, which are the purchased shares of ownership in a company, bonds are a company or public entity's debt obligation.
There are four basic categories of bond issuers in the markets:
- Corporate bonds. Companies issue bonds rather than seek bank loans for debt financing in many cases because bond markets offer more favorable terms and lower interest rates.
- Municipal bonds. They are issued by state and local governments and fund public works such as parks, libraries, bridges & roads, and other infrastructure.
- Government bonds. Those are debt securities issued by a government to raise money to finance projects or day-to-day operations. Government bonds are considered low-risk investments since the government backs them.
- Agency bonds. They are issued by government-affiliated organizations such as the Federal National Mortgage Association (Fannie Mae) or General Services Administration.
2020-12-03 • Updated