A share of stock represents a share of ownership in a corporation. Stock is ownership in the most literal sense – you get a share of every profit the corporation or organization makes. The more shares you buy, the bigger your stake becomes. Bonds typically have a predictable stream of payments and repayment of principal; you can invest in them to preserve and increase your capital or to receive dependable interest income.
When you use bonds during retirement, you can avoid plunging into your retirement accounts early by using your bonds instead. You can also defer paying taxes on the interest that your bonds earn until you redeem them.
You can also cash bonds when you retire and report the tax-deferred interest as income at that time (when you might be in a lower income tax bracket). The interest rates on bonds are typically greater than the rates paid by banks on savings accounts. As a result, if you are saving and you don’t need the money in the short term, bonds will give you the greatest return without posing too much risk. Government bonds are the safest of all investments, backed by the full faith and credit of the US government. When the stock market is facing ups and downs, bonds can help steady your pulse because they are a very safe financial tool to help balance the risk in your overall portfolio.
How do bonds work?
Bonds are sort of a debt security, in which the authorized issuer owes the holders a debt and is obliged to repay the principal and interest at a later date which is termed as maturity.
Let’s make it easier for you. A bond is a loan and you are the lender. The borrower on the other side may be the US government, a state, a local municipality or a big company. When bonds are issued, you pay a price, which is known as its ‘face value’. Once you buy it, the issuer promises to pay you back on a particular day, known as the ‘maturity date’ at a predetermined rate of interest, known as the ‘coupon’.
An example of a typical bond: A company issues a $30,000 10-year bond with a 6% coupon rate. Each year, the owner receives $1,800 (6% of 30,000), paid in two semiannual installments of $900.