Definition

• A bond is a representation of debt issued by a municipality, state or nation, or by a company. By buying a bond, you are essentially providing the issuer with a loan at an agreed-upon interest rate.
  
  

Backing Up the Debt

• By issuing a bond, an entity is backing up the debt. For instance, bonds issued by the U.S. Treasury are backed by the full faith and credit of the U.S. government. Very rarely will a bond be defaulted upon, unless the issuer becomes insolvent and can't pay back the loan.
  
  

Interest Rates' Effect

• When interest rates fall, bond prices rise; when interest rates rise, bond prices fall. If you hold a bond until maturity, such price fluctuations don't matter. But if you cash in before maturity, you could lose money.
  
  

Reducing Risk

• Carefully research the issuing organization for any bond you are considering purchasing. Be especially wary of bonds originating in some foreign countries, since they may carry a high risk of default.
  
  

Diversify

• A good way to avoid the risk of default is to buy a diverse selection of bonds. A mixture of municipal, state, federal, and corporate bonds can add greater safety to your portfolio.