Investing in Bonds: The Basics

Bonds provide a fixed income as compared to variable returns offered by equities and other assets. Therefore, investors view the bonds as essential when the need of steady flow of income arises. However, when rising inflation affects interest rates, negative bond returns are experienced and bond holders incur large losses, as happened in the decade of 1970s. Therefore, it is best to hold long-term bonds if interest rates are falling. Maturities should be shortened if interest rates are likely to rise in future. If a bond provides a much higher yield than U.S. Treasury bonds, then there is a credit risk associated. This chapter discussed U.S. Treasury bonds, bonds that are default risk free. It also describes how bond yields vary by maturity. Treasury yields are certainly influenced by the maturity of the bond. The inferences are that bond returns are more variable the longer the maturity of the bond. The various strategies for investing in any type of bond are discussed in this reading. Strategies will include “buy and hold,” “laddering” the bond portfolio, and investing in bonds via mutual funds.