Bonds are sometimes referred to as a debt investment. Investors who buy bonds are actually providing a loan to the government, which the government promises to pay back along with periodic interest payments. The safety of a bond is determined by the ability of its issuer to pay back its loans to investors. Government bonds are considered the safest of all bond types.
According to numbers provided by New York University, U.S. Treasury bonds have provided a 5.28 per cent average annual rate of growth since 1926. Bond yields have not varied much from one decade to the next. For instance, between 1960 and 2010, bonds yielded investors a 6.96 per cent annual average, and between 2001 and 2010, they provided an average yield of 5.8 per cent.
Government Bonds vs. Corporate Bonds
Duke University performed a study comparing the performance between U.S. government bonds and corporate bonds. If you were to buy 60p in government bonds in 1925, your investment would have grown to £19 by 1995. If you invested that same dollar into corporate bonds, it would have grown to £28 during that same period.
Risk and Reward
There is a positive relationship between risk and reward. Government bonds offer investors the least amount of investment risk among the bond asset class. People are risk averse, so to get them to assume more risk, it is necessary to offer higher rates of return on their investment dollars. Corporate bonds are slightly riskier, so they usually pay higher yields than government bonds.
One of the main reasons many investors choose to invest in bonds instead of stocks, which pay significantly higher rates of return over time, is investment stability. Bonds, as a class, hold their value much better than stocks during stock market corrections. For example, stocks lost almost 80 per cent of their value from the market peak in 1929 and their low in the early 1930s. Bonds lost none of their value during this same period.
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