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What are bonds and what role do they play in a portfolio?
Bonds are a type of debt-based security issued by a government or company to finance its operations. In other words, a bond is a loan made by the investor to the organization issuing it.
This bond entitles the investor to regular interest payments, known as coupons, throughout the bond’s duration, as well as the ability to sell the bond on the open market whenever the investor chooses. At the end of the term, also known as the bond’s maturity, the issuer must repay the initial amount. Please note that when trading in CFDs, no coupon or interest payment is entitled to the investor.
The benefit of holding bonds in a portfolio is that they are considered much safer than stocks. Unlike holding cash, bonds also benefit from the yield of coupon payments. Longer-term bonds tend to offer a higher coupon due to the opportunity cost of having capital locked up. This is also true when the issuer has a lower credit rating, as it’s considered a riskier investment.