Bond investing, like gold investing, is a low return/low risk type of investment.

What Is A Bond?
A bond is a piece of paper that someone issues you which says they owe you a certain amount of money over a certain period of time, payable at a certain interval. There is also a set date where the money must be paid back, at a higher price than it has been borrowed.

For example, let’s say your uncle Jim started a business. He needs $10,000 right now and you just happen to have $10,000 laying around to invest in him. In that case, you might write down on a piece of paper that uncle Jim will pay you back $20,000 5 years from now and will give you $300/month in the meantime. That piece of paper would be a bond.

Why Invest In Bonds
Let’s examine a few investment options people generally engage in:

Stocks are high risk – high payoff. If the company you invest in makes it big, you make a lot of money. If the company goes down, your stock goes down. It’s directly tied into how the company is doing.

Savings account are very low risk and very low payoff. Currently, you make less than .5% interest by keeping money in your bank account. However, the money is FDIC insured, so you have basically no chance of losing it.

Bonds, on the other hand, are just the thing in between. It has higher risk than a savings or money market account and lower risk than stocks. Additionally, whether the person who owes you is doing well or not, they still have to pay you. In that sense, you have higher priority than stock holders. If the company you invest in goes bust, then you are the ones that get paid first from the liquidable assets.

Types Of Bonds
Bonds come in all shapes and forms. Because the risk involved with investing in uncle Jim is not the same as the risk involved with investing in the US Treasury. That is why bonds have grades, ranging from AAA to D or lower, where AAA is extremely reliable (like some sort of government entity), and D is really unreliable (like uncle Jim).

Of course, with the extra risk comes extra returns. On the reliable end of the scale, US Treasury bonds can offer returns such as 3-7%/year. As long as the US government is in business and inflation isn’t too bad, you’re getting your chunk of change every month. On the other hand, if you’re buying bonds for companies that are about to go bankrupt, the returns may be 20%+/year – that is, if the company is still around to pay it out. The thing with bonds, like any other kind of debt, is that the person who is supposed to pay you needs to have the money.

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So there you have it – a brief coverage of bonds. Make sure that your risk tolerance is okay for the type of bond you have selected. If you’d prefer a more riskier investment, try stocks. Or if you’d prefer something safer, try a savings account, or money market!