Understanding bonds

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Bonds are commonly used as part of a diversified investment portfolio because they can offer security and income. Because of this, they are particularly useful for those either close to or already in retirement. But despite being such a common investment, the fancy terminology that surrounds bonds leaves many investors scratching their heads. That's not a good position for an investor to be in, so let's take a look at what a bond is.

The concept behind bonds is rather straight forward: bonds, which are also called fixed-interest or fixed-income securities are like big 'IOUs' where you are the lender. When a government or corporation need money, one option available to them is to borrow money from investors by issuing bonds. The bond is a promise for the institution to repay you the exact money you lent them as well as interest on that money, which is set at a fixed price (hence the name 'fixed-income securities').

The conditions of the bond are clearly set out before you make your purchase, but to understand what you'll be investing in, you'll need to familiarise yourself with some industry jargon.

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