A bond or fixed interest security is an instrument of debt issued by a company or government that is repayable after more than one year. Whereas owners of equity have the right to a company's assets, bondholders are effectively lending a company money and so own its debt. In the event of the company falling into trouble and declaring bankruptcy, the owners of the bonds get priority over the equity holders for any assets that may be available to these two types of investors.

Investors may normally associate bonds with low risk and low returns, and equities with higher risk and thus potentially higher returns. For investors who diversify their portfolio of funds using bonds, they will notice that returns from their bond funds fluctuate less than their equity funds. So why are bonds less volatile than equities? The answer lies in the difference between these two asset classes.

Bond characteristics

Some important points to note about bonds

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested