Hi, Erin. Sometimes I've heard the phrase “bonds are solid” from people who are arguing that bonds can provide a stable foundation to an investment portfolio. While this can generally be true, like a lot of things in life, it depends.
First, what is a bond? It's probably easiest to think of a bond as a loan from the issuer to you. The issuer promises to pay you back on certain term and conditions (the interest rate and times you’ll be paid, and when the balance will be paid back to you).
The good thing about bonds is that the income is fixed, based on the interest rate the bond pays (or a combination of the stated interest rate and the price you paid for the bond if you paid something other than the face value).
The bad thing about bonds is that the income is fixed, as stated above. The current very low interest rate environment clearly illustrates why this can be a bad thing.
So, just how solid a bond is depends on the stated interest rate, any difference in the purchase price from the face value, how long you hold the bond, and the terms under which you sell the bond. Additional factors that can have a significant impact on the market value of a bond are its credit quality (essentially the perceived ability to pay off the bond by the entity issuing the bond) and the duration of the bond (generally, the shorter period of time until the bond is scheduled to be paid off, the lower the risk factor).
One additional factor you may want to consider is diversification. Owning just one or a small number of bonds generally carries a higher degree of risk than owning a broadly diversified portfolio of several bonds (which could provide you with a more “solid” investment). | 09.06.13 @ 22:07