Bonds: what they are and why they are undervalued

Financial data on a monitor,Stock market data on LED display concept

A bond is a debt security that obligates the issuer to pay a certain amount and interest for the use of funds at a predetermined time. It’s worth noting that while when you buy stocks, you become a co-owner (member) of the company, when you buy a bond, you simply lend the issuer your money.

Another key difference between stocks and bonds is that a bond owner has a 99% probability of receiving a fixed income in the form of a coupon and face value, while the owner of stocks is in a much more risky position.

How to choose a good bond? Simple: the higher the credit rating, the lower the risk of default. Consequently, these bonds are best at protecting your portfolio during periods of high volatility.

Many investors undervalue bonds for one simple reason: annual interest on them can be as low as 1-2%. In the pursuit of profits, that’s not a very impressive result. However, holders of debt securities feel better than others during periods of major corrections: money is always in the works and at any moment an investor can “take it out” to buy sagging interesting stocks.

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