Bonds are a type of security traded on global stock markets.
In fact, bonds are one of the most traded securities worldwide, making it important to understand what they are and how they are used.
In essence, a bond is a fixed-income security, representing a loan made by an investor to a company or government issuing the bond.
For investments, companies issue corporate bonds and governments issue treasuries.
Government bonds can have names: US government bonds are known as Treasury Stock or Bills, and UK government bonds are known as Gilts.
When you buy a bond, you are lending money to the issuer in exchange for a periodic interest payment, over a specific period of time until maturity, when the bond's face value is returned to investors.
Bonds are considered safer investments compared to stocks because they provide regular income and a guarantee of the return of your capital.
Be aware that the guarantee is only ever as good as the financial standing of the issuer!
Unless you are buying the bond when it's first issued, the price will likely differ from the face value and so the guaranteed maturity could be less, or more, than what you pay or invest, governed by market rates.
Bonds and interest rates have an inverse relationship. So, as rates fall, bond prices rise and, as rates rise, bond prices fall.
The sensitivity to interest rates is governed by the bond's duration (its time to maturity).
Longer duration means more volatile pricing when interest rates change.
For cautious investors and those wanting income (retirees, for example), bonds are essential for diversifying investment portfolios and managing risk, as well as providing regular income.