When you purchase bonds, you purchase a piece of the company's debt. For the potential of fixed income, you take on some of the risk, of the company going bankrupt.
A deeper explanation may be found at en.wikipedia.org. Typically, a good mixture of stocks and bonds is advised. See how your portfolio compares at online.wsj.com.
Personally, I like the idea of holding 40% in stocks and 60% in bonds as mentioned in Can You Develop a Portfolio With Little Experience?. It all depends on your personal risk tolerance and the risk associated with bonds as discussed in 10 Investments Ranked From Least Risky to Most Risky. An explanation for why bonds tend to be less risky can be understood by reading 5 Obligations for a General Public Company.
Happy reading! Please come back soon to see why we focus on purchasing assets rather than the rate of return.
This post was reposted from http://finlit.biz/retirement-2/what-is-a-bond/, originally written on February 24th, 2013.
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