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When you buy a bond, you are essentially making a loan. The organization to which you lend your money - typically a company, government or government agency - promises to repay the full amount of your loan on a specific date. Until that time, it pays you a stated rate of interest on the use of your money. Because their income payments are fixed, bonds are also known as fixed-interest investments.
Bonds have different maturity dates - the date on which a bond issuer must repay the money borrowed. Maturity dates range anywhere from a few years to as many as thirty years.
Bonds tend to carry less risk (and offer lower returns) than shares. Bonds issued by corporations tend to be riskier - and therefore higher Yielding - than those issued by governments simply because of the quality of the promise to repay the original loan.
Bond values go up or down as a result of changes in interest rates. When interest rates drop, bond prices tend to climb; when rates rise, bond prices often fall. Here's why: Say you purchase a $10,000 bond when rates are 7%. That bond would provide $700 annually. If rates rise to 8%, a new bond purchased at this rate would pay $800. Because your 7% bond provides $100 less income per year, it's now less valuable and its price tends to go down. The opposite would be true if interest rates declined.
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