Benefits

While there are many types of bonds with varying characteristics and features, we can discuss their general benefits. In future chapters, we’ll learn about different types of bonds that come with unique risks, benefits, and typical investors. For now, let’s discuss the big picture.

The primary benefit associated with bonds is interest income. Most pay interest on a semi-annual basis, and the interest payments are legal obligations of the issuer. Unlike dividends from stock, there is no approval required by the Board of Directors (BOD) to make an interest payment. In fact, the bondholders will collectively file a lawsuit against the issuer and take them to bankruptcy court if an interest or principal payment is missed. This makes income from bonds generally more predictable and safe.

Capital appreciation could occur, especially if interest rates were to fall. However, interest rate fluctuations are not easily predictable, plus bonds always mature at par. If the investor holds the bond long enough, they’ll eventually receive the face (par) value back at maturity. Therefore, most bond investors don’t seek capital appreciation unless their bond is convertible (we’ll discuss this later).

While not always the case, bond market prices are less volatile than stock prices. With bond interest being a legal obligation of the issuer and not contingent on the company’s profitability, market price fluctuations are typically mild. Of course, there are exceptions. If interest rates fluctuate significantly or if the issuer is on the brink of bankruptcy, wild market fluctuations will occur.