Bonds are essentially an “IOU” to an institution of some kind, typically from a government. You agree to loan your money, which you’re investing in for a specific length of time. In return you will be paid interest. You have loaned cash to a borrower and you will be repaid the full amount on a date on the bond. You will also be paid a coupon rate or percentage of interest on that investment usually paid out twice a year, in a manner similar to the dividend. The beauty of the bond is that these interest payments can provide a extra stream of income. The rate of interest is typically fixed. You have a promise to be paid even if the value of the bond fluctuates during the time that you posses it.
The period of this bond loan can range from 1 to 30 years. Often the borrower is the federal government or state, corporation or even a bank. They want your money as a means of raising extra leverage for the institution, like any loan or payday advance. Generally federal bonds are considered the safest. This is because it isn’t likely an entire government will default on your loan unless the entire country falls apart. Historically, this usually only happens when the government is in a period of tremendous inflation or economic woe, such as the Weimar republic of Germany prior to World War 2, this is generally a rather rare, so you shouldn’t be too worried about your investment if it’s in the hands of a government, especially if it’s a first world government. Whereas corporate bonds offer far higher yields, yet they also carry a much higher risk of default than a government.
When looking at bonds one should evaluate them based on the potential risk they carry. The ones with the absolute minimum of risk, a little risk and great risk should be categorized. Keep in mind, absolutely all bonds are can run into interest-rate risk, or declining value when interest rates rise. Generally the greater the time span, the greater the risk. A bond of about 2-3 years is almost risk free whereas a bond of 20 years carries a significant degree of risk. The other kind of risk is the risk of default. This is why US treasury notes or insured municipal bonds as have the least risk whereas buying a bond from a corporation is significantly risky.