A bond is a debt security, similar to an I.O.U. When you purchase a bond you are lending money to a government (gilts), a municipality, a corporation (corporate bonds) or another entity, known as an issuer. In return for that money, the issuer provides you with a bond in which it promises to pay a specified rate of interest during the life of the bond and to repay the face value of the bond (the principal) when it matures, or comes due.
Typically, bonds pay interest semi-annually, which means they can provide a predictable income stream. Many people invest in bonds for the expected interest income and also to preserve their capital investment.
Many personal financial advisors recommend that investors maintain a diversified investment portfolio consisting of bonds, stocks and cash in varying percentages, depending upon individual circumstances and objectives. Understanding the role bonds play in a diversified investment portfolio is especially important for retirement planning.
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