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Bonds are a type of investment vehicle. Specifically, a bond is a guarantee to pay investors at a later date in exchange for their purchase of bonds. In essence, bonds are a way for governments and organization to borrow money from individual investors. Bonds are popular with companies and state, local, or even federal governments. Investors earn returns on bonds because the entity issuing the bond pays interest for the "loan" at a preset rate until maturity. Bonds can be issued at a variety of interest rate levels, and they payout over a specific period of time. Bond portfolios are simple, and individuals can hold a variety of bonds from different companies.
Investing in bonds is a financial strategy. You can buy and hold bonds, index match, and aim to make the most profit possible, known as active investing. With the buy-and-hold strategy, the bond holder wants to make the most out of the income that the bonds generate. Investors will purchase bonds and keep them until they mature. In the mean time, they will use the cash flow or the periodic interest payouts as disposable income or to reinvest in other types of securities.
The index matching strategy is best used with a larger bond portfolio. The bonds are structured in ways that will copy a major published bond index. The purpose of this strategy is to formulate the bond portfolio so it provides the same returns as the index after which it is formed. Lastly, the active bond is a strategy geared toward ensuring the holder of the bonds the maximum profit possible. This requires placing extreme importance on the interest rates that each bond presents. The investor will have to be aware of past and predicted performances of each bond within the portfolio in order to make an educated decision on which bonds will provide the best return.
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