Bonds

Debt investments in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, states and federal governments to finance a variety of projects and activities. Bonds are commonly referred to as fixed-income securities and are one of the three main asset classes, along with stocks and cash/cash equivalents. The indebted entity (issuer) issues a bond that states the interest rate (coupon) that will be paid and when the loaned funds (principal) are to be returned (maturity date). Interest is usually paid every six months (semi-annually) and in some cases, annually. The main categories of bonds are corporate bonds, federal bonds and state bonds, notes and bills, commonly referred to as “Treasuries”. Two features of a bond—credit quality and duration—are the principal determinants of a bond’s interest rate. Bond maturities range from a 90-day treasury bill (T-bill) to a 30+ year government bond; corporate and states are typically in the three (3) to 10-year range.