What is a bond and why does it matter to your retirement?

When it comes to managing money, nearly everyone feels overwhelmed: Nearly 90% of U.S. adults say they experience financial stress.

One way to help manage that stress and build confidence? Build up your knowledge of investing basics. That includes understanding bonds. Bonds play a key role in how you save for long-term goals, including retirement. These basics about bonds can help.

A bond is basically a loan, given to either a company or the government. You may buy a bond yourself (think education savings bonds) or bonds may be purchased as part of an investment fund. After a bond is purchased, that company or the government uses the funds for a set amount of time. When you are paid back at a date in the future, you receive the purchase amount plus interest.

Bonds can play a key role in diversifying investments, particularly retirement savings. That’s because while bonds don’t have the same growth potential as stocks, they do provide a guaranteed return over time. (That length of time varies from months to up to 30 years.) And a bond’s return is typically guaranteed, unless something unusual, like bankruptcy, happens. So bonds help to:

• reduce overall risk in an investment mix
• provide balance with investments like stocks, which have more potential for ups and downs
• offer stabilized growth for part of your investments

A few simple terms can help you understand bonds, and how bonds are different from stocks.

• Issue date: The date the bond is sold
• Face value: The bond’s principal value, or the amount of money loaned to a company or the government
• Maturity date: Date the bond principal (aka your money) is due back to you
• Coupon rate: Annual interest rate paid to you on a bond
• What you earn: Face value plus interest; typically guaranteed

No investing is without risk, but in general bonds are less risky than stocks. Whether a bond is risky or not depends on a few factors such as:

• the bond’s issuer; may be riskier if a company has financial difficulties.
• the economy; if a company is stressed by economic conditions, they may have more difficulty paying back bonds.
• the length (term) of the bond; over a longer period of time, the economy may impact the finances of a company that issues the bond.

Another note: If a bond is considered riskier, it may have a higher interest rate.

The U.S. began issuing digital bonds in 2012. However, if you have a paper savings bond, you may still redeem it at the U.S. Treasury website.