Buying a bond is loaning your money to a corporation for a certain period of time, at a specific interest rate. Similar to stocks, as noted in Investment Tip 2, benchmarking is key in measuring your investments. Government bonds should be compared to government bond averages and corporate bonds should be corporate bond averages; these average performances are your benchmarks.
Unlike stocks, with bonds you can:
- Government bonds exist at the local and federal level
- Invest in a specific project, instead of the entire company
- Have a time horizon (often long-term investments)
- Must be repaid by the debtor (corporation/government)
- Values are determined by interest rate
- Credit quality, which measures risk, is given by credit rating agencies