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Speaker: Once and for all, it's time to break down bonds. When you buy a bond, or a fixed-income security, you're actually lending money to an entity -- the U.S. Government, your town, a company -- for a set period of time from 30 days to 30 years at a fixed rate of interest. Bond prices fluctuate based on the general direction of interest rates. Here's how that works. If you already own a U.S. Government bond that's paying eight percent, it'll be worth now, when new bonds issued by Uncle Sam are only paying a paltry three percent. Conversely, if your bond is currently paying three percent, and your friend can purchase a new bond paying five percent, nobody will be interested in your bond, and the price will fall. That's why, during the lift of the bond, the price can fluctuate, which is often misunderstood by investors. Something else to remember, if you hold your bond until maturity, your principle will be returned. Although hailed as safe, bond investors face two types of risk. One is credit risk, the risk of default, or that the entity does not pay you back. That's a pretty low risk if the entity is the U.S. Government, but can be a high one if it's a company that's in trouble. The other risk is what bond geeks refer to as duration risk. This is the risk that, even if the bonds are paid in full, the promised rate of interest will turn out to be worth less over time due to inflation. Now, that was easy, wasn't it? Now, you may feel more comfortable adding bonds to your portfolio.
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