At their most basic level, bonds are a way for one entity to raise money by borrowing from another. For example, governments and corporations issue bonds to raise money from investors when they need new sources of capital to fund their activities.

In Topic 1 of this series, we covered the basic concept of bonds along with the different types available. Once your clients have grasped these key concepts, they’ll want to know how they make money from bonds.

Most investors have a good understanding of shares and how they work. A great way to frame a conversation about bonds is to leverage these familiar concepts to make bond investing easy to understand.

Since the evolution of the modern bond market, investors have used bonds as a way of diversifying their portfolio, generating income and preserving their capital. Some even use the bond market as a capital appreciation tool.

Many investors know that bonds are a relatively stable investment, while others could tell you that bonds are a form of debt used by companies and governments. However, due to the ins and outs of bond pricing and performance, many investors may find a gap in their knowledge.

When it comes to bonds, the role of interest rates is often less well understood. For investors who want to build a deeper understanding of the fixed income market, the relationship between bonds and rates is critical knowledge.

Duration is a word that often appears in discussions of the fixed income market. Indeed, it’s an important part of understanding the risk of a bond investment. Making sure clients have a thorough understanding of duration is essential when advising them about bonds.

The term "yield curve" is frequently used by investors and commentators when discussing the outlook for bonds, markets and the economy more broadly. But despite its common use, it is a concept that many investors don’t understand well.

The basic concept of inflation reflects the changing prices of goods and services, and has potential impact on investments, particularly bonds. However, the bond market is large and diverse, and it provides many opportunities for investors in all sorts of inflationary environments.

If there is one thing that makes bond holders nervous it’s when interest rates rise. Worried about declining bond prices, investors may think their best option is to sell. But rising rates aren’t always bad for bond investors. Indeed, there are several ways to navigate and benefit from rising rates.

In recent decades, bonds have evolved into a $100 trillion global market. With such scale, there is a wide range of bonds for investors to choose from and many ways to gain access. Understand the different options available for bonds.

There are many different investment strategies bond investors can use depending on the role bonds will play in their investment portfolios. Investors first need to choose an active or a passive investment approach, and then they can choose the most appropriate underlying strategy.

Like any investment decision, choosing to invest in a bond or bond fund requires careful consideration. Focusing on a handful of key factors – namely, return potential, risk and fees – can make the task easier.

Bonds are broadly considered to be low-risk investments when compared to asset classes like equities and property. Despite bonds’ generally less volatile performance, however, there are still several risks that investors need to understand when investing in the bond market.
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Like any investment, bonds come with risk – including (but not limited to) interest rate risk and reinvestment risk. When investing in bonds, some investors like to use an investment strategy known as ‘laddering’ to help reduce their exposure to these risks.