Bonds are a form of debt. Bonds are loans and the bond buyer serves as the bank. You can loan your money to a company, a church, a hospital, a city and to the federal government. They promise to pay you regular interest payments and promise to pay back the full loan or bond amount at maturity. A city may sell bonds to raise money to build a library or a school. The federal government issues bonds to finance its spiraling debts.
You can buy individual bonds, including municipal bonds or corporate bonds or other government bonds. You can also take the easier road and buy bonds using a mutual fund or ETF.
MUTUAL FUNDS – Bonds You can buy a mutual fund that focuses on bonds. For example, FAGIX (Fidelity® Capital & Income Fund) is a mutual fund with stocks, cash and bonds (67% bonds.) One of the reasons I dislike “target date funds” is that they grow your bond allocation as you get closer to the “target” date.
ETFs – Bonds An example of an ETF that focuses on bonds is HYG. HYG is iShares iBoxx $ High Yield Corporate Bond ETF and it has 99% of the fund’s assets in corporate bonds.
Are Bonds Safe?
Many think so. Bonds, however, are generally less volatile and that seems to make them safe. Bonds can become worthless or next to worthless if the issuer is unable to make payments or return your original investment. This is true of corporate bonds (think General Motors) and government bonds (think Detroit). Bonds also are not as likely to grow in value and you won’t receive increased interest during the bond’s term. For that reason I prefer stocks with growing dividends.
The following AAII article might help explain the risks in more detail.
Know Your Flocks & Herds 