Why Bonds Should Be an Important Part of a Diversified Portfolio

By Rick Kahler via Iris.xyz

As I pointed out last week, bonds are the hardest investment class for most people to understand. Just to make things more complicated, not all bonds are the same. There are great differences between government, corporate, long-term, short-term, TIPS and high-yield bonds.

Both governments and corporations issue bonds when they have a need to raise money. High quality bonds are those rated as unlikely to default. Most governments and large, creditworthy corporations carry a small risk of default. If a country like the US, the UK, or Japan borrows money there is no way they can default. Because they can always print money to cover their debts, it’s impossible for those countries to go bankrupt. However, a municipality or state government can default on its debt, just as any corporation can.

Another major classification of bonds, high-yield bonds, can also be referred to as junk bonds. These are the bonds of governments and corporations that are having credit problems. Because the risk of default is higher, these bonds sell for a large discount, making their yields higher than those of high quality bonds.

Treasury Inflation Protected bonds (TIPs) are usually government bonds that are indexed to inflation.

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