As an investor when you invest in a bond, what will be your risk-return profile? Why an investor chooses bonds over stock investments?

ANSWER

Want to strengthen your portfolio's risk-return profile?

Adding bonds can create a more balanced portfolio by adding diversification and calming volatility. But the bond market may seem unfamiliar even to the most experienced investors. Many investors make only passing ventures into bonds because they are confused by the apparent complexity of the market and the terminology. In reality, bonds are very simple debt instruments.

Although the bond market appears complex, it is really driven by the same risk/return tradeoffs as the stock market. Once an investor masters these few basic terms and measurements to unmask the familiar market dynamics, then he or she can become a competent bond investor. Once you’ve gotten a hang of the lingo, the rest is easy.

Why bonds over stocks?

• Bonds tend to be less volatile and less risky than stocks, and when held to maturity can offer more stable and consistent returns.
• Interest rates on bonds often tend to be higher than savings rates at banks, on CDs, or in money market accounts.
• Bonds also tend to perform well when stocks are declining, as interest rates fall and bond prices rise in turn.