bond
A fixed-income investment where an investor loans money to an entity (corporate or government) for a defined period at a fixed interest rate.
Example
“She bought government bonds to provide stable, low-risk income during retirement.”
Memory Tip
A bond BINDS the borrower to repay you with interest. Like a bond between friends — a promise.
Why It Matters
Bonds are the bedrock of conservative investing and the primary way governments and corporations raise capital. When stocks fall bonds often rise providing stability. As you approach retirement shifting from stocks to bonds is the standard way to reduce portfolio risk.
Common Misconception
Many people think bonds are always safe. Bonds carry two main risks most investors underestimate: credit risk where the issuer may default and interest rate risk where rising rates cause existing bond prices to fall. Long-duration bonds can lose 20-30% of their value in a rising rate environment.
In Practice
When the Federal Reserve raised interest rates aggressively in 2022 the Bloomberg U.S. Aggregate Bond Index fell about 13% its worst year in decades. Investors who thought bonds were always a safe haven were surprised. This illustrates why bond duration credit quality and the interest rate environment all matter.
Etymology
From Old English 'band' meaning 'something that binds' — a binding agreement to repay.
Common Misspellings
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