A bond is basically an IOU. When someone buys a bond they are lending money to a government agency or a private company that has issued the bond. In return they promise to pay the person a fixed rate of interest, which is known as a coupon, at fixed intervals, for a fixed period of time (known as the term).

At the end of the term, the bond matures and the person is repaid the principal or face value of the bond. The amount of money the bond will make until it matures is predetermined. This is why a bond is referred to as a fixed income security.

As said earlier, a bond is normally a listed investment that pays a fixed rate of interest and is repaid at a specific time in the future. Its interest rate (coupon) is known in advance and is based on a specific value, which may well be different from the price you pay.

When it comes down to getting paid when the company goes down the drain, bonds typically rank high in the ladder. Many people have said that they can be less risky than shares for that reason. With shares you could possibly lose the whole investment.

This may happen with a bond as well, although it is less likely to happen as bond owners are entitled to a portion of the remaining assets. Some people think that bonds are a no risk investment but that simply is not true. Bonds do have some risks that shares do not have.

With bonds you need to be aware of a risk that is known as interest rate risk. As interests change, the prices of bonds already in the market move in the opposite direction. As interest rates move up, bond prices fall down.

Another risk with bonds is known as default risk. This is the risk that the company the issued the bond will not able to deliver the promised interest payments when they are due.

Inflation risk is another risk that people need to be aware of when it comes to bonds. Inflation is rate of increase in the cost of goods and services.

There are many other types of risks involved with bonds but these are three important ones to be aware of for now.