Why do investors buy bonds?

Investors buy bonds because: They provide a predictable income stream. Typically, bonds pay interest on a regular schedule, such as every six months. If the bonds are held to maturity, bondholders get back the entire principal, so bonds are a way to preserve capital while investing. Bonds can help offset exposure to more volatile stock holdings.

What does it mean to buy a bond?

Corporations, governments and municipalities issue bonds to finance various activities and projects. For example, a business may use bonds to buy new equipment or a city to fund a new school. What it means to buy a bond is that you become a creditor of the issuer. This is the key distinction between stocks and bonds.

What happens when you buy a bond?

When you buy a bond, you are lending to the issuer, which may be a government, municipality, or corporation. In return, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the principal, also known as face value or par value of the bond, when it "matures," or comes due after a set period of time.