Benefits

While bonds come in many forms, you can start by focusing on their general benefits. Later, you’ll see how different bond types bring different risks, benefits, and typical investors. For now, we’ll stay at the big-picture level.

The primary benefit of bonds is interest income. Most bonds pay interest semiannually, and those interest payments are legal obligations of the issuer. Unlike stock dividends, interest payments don’t require approval from the Board of Directors (BOD). If an issuer misses an interest or principal payment, bondholders can take legal action and the issuer may end up in bankruptcy court. Because of this legal obligation, bond income is generally more predictable than stock dividends.

Capital appreciation can also occur, especially if interest rates fall. However, interest rate movements are hard to predict, and bonds mature at par. If you hold a bond to maturity, you’ll receive the face (par) value at that time. For that reason, most bond investors aren’t primarily seeking capital appreciation unless their bond is convertible (we’ll discuss this later).

Although it’s not always true, bond prices are often less volatile than stock prices. Since bond interest is a legal obligation and isn’t dependent on the company’s profitability, price swings are typically milder. There are important exceptions: if interest rates move sharply or if the issuer is close to bankruptcy, bond prices can fluctuate dramatically.