A bond is a debt security. Think of it as an I.O.U. When you buy a bond you are basically lending money to the organization that you bought it from, such as a corporation, government, or any other issuer of the bond. The reason companies and/or governments use bonds to raise money is because they might need more money than the bank can supply. Bonds are also know as fixed-income securities because they have a fixed term schedule.

Bonds are a good investment because they have a steady and predictable stream of income over a set period of time. Many financial advisors recommend bonds in your portfolio for this reason. It is good to diversity in your portfolio and this may be a good way to do it.

When buying a bond you and the issuer agree on a interest rate that they will pay you for loaning them the money. Interest rates vary depending on the organization that issued the bond. After the bond “matures” the issuer will pay back the remaining principal on the bond. The term matures means that the life of the bond is up and needs to be paid in full.

Bonds are popular because they are considered safe investments, especially those issued by the federal government. The drawback to being a safe investment is that usually you will not make as much money with bonds as you would with other investments. If you have money that you need in say a year to go on vacation and want to make a little bit off of it you might choose to put it in a bond. If you put it into the stock market you have the chance that you will lose it all, unlike a bond. After the bond matures you will get all the money that you invested back, as well as the interested that you received over the bonds lifespan.

Another reason bonds are a popular investment is because some government issued bonds are tax exempt. This can be great for a retired person or someone who wants to lower their tax liability. Bonds are a good idea if you are retired and want a steady and safe income that you might be able to live off of or at least add to your fixed income.

There are two different types of bonds. One is a taxable government bond which can have a lifespan from three months to thirty years. The other type of bond is a tax free bond. These bonds are municipal bonds and can be tax exempt from all taxes if issued in your state of residence. This can be a good choice for someone that is looking to minimize tax liability.

Bonds can allow you to have a diversified portfolio and can even give you a break on taxes. Which ever reason you choose you can be fairly certain that they are a safe investment. Safe investments are good but the drawback is that riskier investments have a higher yield. If you are retired and need a steady income you might want to look into this type of investment. As with any investment it is recommended that you talk to your financial adviser to find out what your options are and the type of bonds you should, if at all, invest in.