Bonds—also known as fixed-income securities and debt securities—are loans that investors (lenders) lend to issuers (typically companies or the government) to fund various ventures, from new projects to hiring initiatives. The issuer pays fixed interest installments, called coupons, to the lender but gets to use the funds for projects without having to sell stocks or borrow from a bank.

All types of bonds come with the specific details of the loan and repayment plan, including the maturity date, which is when the issuer has to pay back the principal of the bond. They are considered low-risk because of the terms that apply.

Corporate bonds have a lower risk profile (and less upside) than equities because bonds have higher priority in the capital structure of companies. A company must meet its debt obligations before it can reward shareholders. Additionally, if a company faces a downturn and must restructure or liquidate, any proceeds go first to creditors (bond holders) and outstanding interest before equity investors receive anything.

US Government debt is considered an even safer investment and there are tax advantages for the interest received on these securities. However, no debt investment (or any investment) is perfectly safe, and smart investing can find the right mix of risk and reward.

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