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Bond Overview

Bonds are financial obligations of corporations, governments, or government agencies. The issuer usually pays periodic interest to the bondholder and is obligated to repay the value of the bond at a specified time (known as the maturity date).

Short-term bonds normally have maturities less than one year. Intermediate-term bonds normally mature in from two to ten years. Long-term bonds normally run more than 10 years.

Bonds are generally described as less risky investments than stocks, since, if you buy a bond when it is issued and hold it until it matures, you normally get regular income and your investment capital back. The risk you take—in addition to the possibility that rising inflation will undercut the buying power of the interest income you earn—is that the issuer may not be able to meet its obligation to pay the interest and repay the loan. This is known as credit risk.

However, since bonds are rated by independent rating companies, you can buy highly rated bonds that pose virtually no danger of default.

But bonds constantly fluctuate in value, so that if you need to liquidate your bond investment during its term, you might have to sell for less than you paid. That is known as market risk.

Bonds are generally considered a smart way to diversify an investment portfolio, since in most years they perform differently from stocks and in some periods when stocks are depressed, bonds can provide a positive return.

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