Indivi💧duals and institutions use bonds for various reasons. For instance, they may invest in bonds to preserve principal and maxim♌ize income.

Or, they may buy bonds to help manage interest rate ri🧔sk and to add a fix🐻ed-income component to their portfolio that helps diversify it.

People sometimes think of bonds as boring and old-fa🏅shioned, while associating them with gifts f🌌rom their grandparents.

Bonds can also be an afterthought until flight-to-quality events, when investors flock to the safest investments they can find to earn a return and protect their capital as they weather financia🍬l storms.

Bonds are more complex and versatile than many investors may realize. They can provide a variety ꦅof useful benefits for investors in any investment environment.

Read on to learn about six ways that invesꦰtors use bonds. 

1. To Preserve Principal

One of the most common uses of bonds is to preserve principal. This means that an investor will get ba🦂ck their initial investment. If they bought the bond at a discount from par, they will also get the difference between that investmen﷽t amount and par at the bond's maturity.

While preservation of principal works best with bonds that are perceived to be risk-free, like short-term U.S. government 澳洲幸运5开奖号码历史查询:Treasury bills, investors can apply it to other types of bonds as well. Barring any cata🌺stro𒈔phic events, bonds are effective in preserving principal.

Since bonds are essentially loans with scheduled repayments and 澳洲幸运5开奖号码历史查询:maturities, lenders (bondholders) can expect their bonds to retain value and terminate at par upon maturity.

(Note🌱: there can be significant volatility as p💎revailing interest rates change and affect the value of the bond.)

A risk-free bond purchased at par and held to maturity should🌜 preserve pri꧟ncipal, mature at par, and provide a dependable cash flow.

2. To Save

Saving for the future has historically bee♛n one of the best uses of bonds. Savings bonds, as they are aptly named, provide one of the most secure and time-tested approaches to long-term saving.

U.S. savings bonds are guaranteed by the full faith and credit of the U.S. government and are sold in various formats, including discount and interest-paying.

澳洲幸运5开奖号码历史查询:Savings bonds are designed to be held to maturity and are typically given as gifts to young investors to he🍌lp them learn about saving. Upon maturity, the saving can conti⛄nue if the funds received are used to buy additional bonds or other investments.

3. To Manage Interest Rate Risk

澳洲幸运5开奖号码历史查询:Interest rate risk is the risk inherent in all bonds that the price of the bond will fluctuate as prevailing rates change. This risk exists because a bond's priced value represents the present value of the future interest payments and returned 澳洲幸运5开奖号码历史查询:principal upon maturity.

Becaus༺e of this valuation, when current rates rise, all else being equal, the price of an existing bond should fall.

An🥃 investor who believes interest rates are high, and is concerned about the consequent effect on the equities portion of their portfolio, could buy bonds with these higher coupon rates to capture a nice income stream.

If rates drop, the value of their bonds will rise and they may be able to sell them fo🅷r a profit. This plus the income already received could help offset a🌸 drop in value of their equities due to higher interest rates.

4. To Diversify

Diversification is often the most overlooked reason to buy bonds. The generally low correlation between bonds and other 澳洲幸运5开奖号码历史查询:asset classes makes bonds an excellent diversification tool.

For example, one could create a simple portfolio of 澳洲幸运5开奖号码历史查询:large-cap stocks and U.S. government bonds where the 澳洲幸运5开奖号码历史查询:cross-correlation between the assets is usually less than one.

While it is rare to find two assets that are perfectly negatively correlated, the diversification between bonds and stocks can helpꦅ to smooth out those volatile market swings, especially during flights to quality.

5. To Match Expenses

Individuals commonly use bonds to match a future expected cash need. Institutions also use this strategy in a more complex way called 澳洲幸运5开奖号码历史查询:immunization.

The concept assumes a match of the duration of the bond to the expected cash flow. This can be accomplished easily by using a 澳洲幸运5开奖号码历史查询:zero-coupon bond the maturity of which matches the bond's duration. Wไhile this will not provide any income over the life of the bond, it will provide a direct match.

6. To Plan for the Long Term

One of the be꧙nefits of bonds over other asset classes is that they have a predictable stream of income that can be used to fund future expenses for individuals (and the corporate pension obligations of institutions).

This is one of t🌜he 💯reasons that financial institutions, such as banks and insurance companies, use long-term bonds for their long-term financial planning.

Bonds enable them to match their assets to liabilities (commonly known as 澳洲幸运5开奖号码历史查询:asset/liability matching) with a much higher degree ♓of certainty than with other asset cla💝sses.

Risks of Bonds

Of course, none of these strategies will work if the bond's coupon payments or the return of its principal becomes uncertain.

Bonds of all qualities carry inherent risks, such as credit, default, and interest rate risk. The credit and default risk can be mitigated by purchasing only 澳洲幸运5开奖号码历史查询:investment-grade corporate bonds or U.S. government securities.

It's important to note that even bonds that are considered investment grade can quickly fall below this standard.

The risk ass🐲ociated with changing interes𝓰t rates can be mitigated just by holding the bond to maturity, as the par value will be returned at that time.

The Bottom Line

Individuals and institutions should consider making ♛bonds an integral part of their long-term financial planning. Bonds can help investors preserve capitไal, save for the future, maximize income, manage interest rate risk, and diversify their portfolios.

They provide a predictable stream of coupon income and their full par value if held to maturity. Perhaps your portfolio could use a kick like that from these supposedl🔜y stodgy investments.