Bonds are one of many asset classes that lawyers can invest in. A bond represents debt rather than ownership, entitling an investor to a predictable stream of interest payments. These payments are not without risk, and understanding those risks helps lawyers make more informed investment decisions.
Bonds Are Debt
When a company needs cash to grow, it can pay out of pocket, find outside investors, or issue debt. A bond is debt issued by a company or government: investors lend money today in exchange for regular interest payments and repayment of principal at maturity.
The Risks Involved
- Interest Rate Risk — bond prices move opposite to interest rates; if new bonds offer a higher rate, existing lower-rate bonds become less valuable if sold before maturity.
- Reinvestment Risk — the risk that proceeds from a maturing bond can only be reinvested at a lower rate than before.
- Default Risk — the issuer may not make payments on time or in full; credit ratings from S&P, Moody's, and Fitch help gauge this risk.
- Inflation Risk — a fixed interest payment buys less over time as prices rise.
Types of Bonds
Corporate bonds include investment-grade, high-yield, and foreign issues. Government bonds include Treasury Bills, Notes, and Bonds; Agency Bonds (like Fannie Mae and Freddie Mac); Savings Bonds; and Municipal Bonds, which often carry tax advantages for in-state residents.
Final Takeaways
Bonds offer less volatile exposure to growth and predictable income through semi-annual interest payments, but they are not risk-free. Understanding these risks helps bonds play an appropriate diversifying role in a portfolio.
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