The stock market is the most public face of the economy. When the economy is in the doldrums, like it has been for over a year now, the stock market naturally sinks. The S&P 500 index was 35% last year and has seen losses of almost 15% year to date. With these kinds of losses wiping out large chunks of people’s portfolios and retirement accounts investors are beginning to look around for other investment options.

Bonds offer stability and fixed income for portfolios that have been ravaged by the equity markets. While bonds can seem confusing to the uninitiated, they are basic investment vehicles just like stocks and can be used to make and maintain capital.

In its simplest terms, a bond is simply a loan instrument issued by a company or government. The issuers of the loan borrow money in the form of investment from the bond buyer. They then agree to pay interest on the loan at predetermined intervals and pay back the principal at a later date.

There are several factors one must look at when considering buying bonds.

1. Risk: While the risk of bonds depends on the issuer, it’s the most important factor to consider. Bonds from large corporations with healthy balance sheets are great issuers of bonds. Local, state and the federal government also issue bonds to raise money for public works and projects. In the case that a company goes bankrupt bondholders are paid first before anyone else, so there is some sense of protection even in these worse case scenarios. As long as you have faith that the company or governmental body isn’t going to fail and disappear off the face of the earth the bond is a good buy.
2. Return: The return of bonds is dependent on the risk inherent in the company or government issuing them. For example, U.S. Federal bonds will pay less in interest but have a lot less likely chance of defaulting. Corporations may increase the interest payment to intrigue buyers to purchase their bonds in competitive markets. So just because the rate of return is high, doesn’t mean underlying bond or company is bad.
3. Maturity: The amount of time it takes until the bond’s principal is paid back is known as the maturity. Some government savings bonds have maturity dates of twenty years or more. Depending on your time frame the maturity date of the bonds is a considerable issue.
4. Bond Ratings: There are three major bond rating agencies; Moody’s, Fitch and Standard and Poor’s. These ratings agencies rate the ability of a company to meet the bond’s obligations. The higher the bond’s rating the more likely the company is likely to repay the bond. The lower the rating the more interest the company must tack on to the bond to make it appealing to buyers. Thus, companies do everything they can to make sure their company warrants higher ratings.
   • Bonds are rated on a scale with “AAA” the highest and “D” as the lowest.
   • Anything from “AAA” to “Aaa” are considered high-grade bonds.
   • Bonds from “BBB” to “Baa” or above are referred to as investment grade.
   • Bonds from “BB” to “Ba” or below are considered junk bonds.

Bonds can be bought in a variety of forms and ways they offer fixed income in the form of interest payments. The older an investor is, and the closer they are to retirement, then the more bonds they need in their portfolio. Thus, bonds offer the perfect balance to equities. They can reduce the overall risk and volatility of an investment portfolio and can help investors have a little more confidence in their financial features.