Practical guide
What is a bond
With a bond you lend money in exchange for structure and relative stability: less adrenaline than stocks, often more balance in the journey.
Key points
- Coupon and maturity are the basic elements
- The main risk is issuer or credit risk
- Bond prices react to interest rates
- Bonds are often used to stabilise a portfolio
The basic logic
A bond is a loan: you are the creditor, the issuer is the debtor.
You receive periodic interest (coupon) and, if all goes well, the capital back at maturity.
Why the price rises and falls
When market rates rise, many existing bonds become less attractive and their price tends to fall.
When rates fall, the mechanism works in the opposite direction.
How to use bonds in a retail portfolio
They mainly reduce overall swings; they are not magic return generators.
For long-term investors, the bond allocation can be a psychological cushion as well as a financial one.
What to do now
Define how much calm you want during drawdowns: that answer helps determine your bond allocation.