Bonds are like IOUs. Borrowers (usually businesses) issue bonds to raise funds by reaching out to investors who will lend them the money for an agreed interest rate for a certain period of time.

Bonds are a great tool for the income investor who wants to balance their portfolio to include assets beyond stocks.

Before you even invest in bonds, here are the essential terms that you should know.

Government bonds: bonds that are issued by a government. The securities with 1 year maturity are usually known as treasury bills.  Most government bonds are rated by credit rating agencies. Not all government bonds are investment grades.

Corporate bonds: bonds that are issued by corporations or companies to raise funds for their business operations. These usually carry more risks and hence their interest rates are usually higher. Some of the corporate bonds are not rated and bond investors …