When building your investment portfolio, you have three main investment vehicles to consider — stocks, bonds and mutual funds. Of these, bonds are usually considered a more secure investment than stocks or mutual funds, which typically offer a steadier income stream.

If you’re just getting started on your investment portfolio, here are some basics about bonds and why they can be beneficial.

What is a bond?

A bond is a fixed income investment where an investor loans money to the government or company (by purchasing a bond) for a specified period of time for a fixed interest rate. 

The owners of bonds are creditors of the issuer. When the bond reaches maturity, the issuer repays the bond owners the original face value of the bond plus interest. Bonds are often issued by governmental agencies to raise money for roads, schools or infrastructure. Corporations often use bonds as they grow their business — buying property and equipment, hiring employees, or funding research and development.

The characteristics of a bond

Bonds have five main components: 

Issue price. The price you pay for the bond. This can be less than the face value of the bond, which means the bond was purchased at a discount. 

Face value. How much the bond will be worth at its maturity. This amount will vary depending on the bond. 

Coupon rate. The rate of interest the bond issuer will pay on the face value of the bond, always expressed as a percentage. The coupon rate is determined by the credit quality of the issuer and the time until the bond matures. If the issuer has a poor credit rating, the risk of the issuer defaulting is higher. These bonds typically carry a higher coupon rate. Bond maturities can range from a day to more than 30 years. The longer the duration of the bond, the higher the coupon rate. 

Coupon dates. When the bond issuer will make interest payments. Typically, interest is paid to the bondholder twice a year. 

Maturity date. When the bond will mature and the bond issuer will pay the bondholder the face value of the bond. An investor does not have to hold a bond through to its maturity date.

Types of bonds

Bonds can be issued with one of two features, but may not have either one: 

Zero-coupon. These bonds (often called Z-bonds) don’t return regular interest payments. They sell at a discount equal to what the coupon rate would be on a similar bond. 

Convertible. The bond owner can convert their debt into the issuer’s stock if the stock price rises to a level desired by the investor. 

While the return potential of bonds is not as great as with some other investments, they can help you offset some of the risk of stocks and mutual funds. 

The key to investing is managing your risk against potential reward. If you’re ready to get started investing in bonds, it can't hurt to turn to a trusted advisor for help in reviewing your options.