By Douglas Goldstein, CFP®

Would you like to own an investment that is stable, pays regular interest payments, and is designed to return principal on a predetermined date? If so, speak to your financial adviser about buying bonds. Though bond rates are lower than they have been in the past and entail certain risks, bonds may be able to play an important role in your account. Here’s why….

Do bonds return principal?

When you buy a bond, what you are really doing is loaning money to a company or government. A treasury bond, for example, is a loan that you make to the U.S. government. As long as Uncle Sam is still around, you should get your entire principal back at the maturity date … with interest, too. Keep in mind, though, that if you buy a bond from a less solid country or from a company, their guarantee might not be worth the paper it’s written on. If the bond’s underlying company/country defaults, you might not get your money back.

Lower volatility

Because bonds have some level of principal protection (presuming they don’t default), their prices tend not to be as volatile as stocks. Though changes in the prevailing interest rates and problems with the bond issuers can and do affect their prices, people often use bonds as a relatively stable anchor for their portfolios. For a more in-depth review of bonds, Building Wealth in Israel has a whole chapter dedicated to the topic.