Bonds are a form of investing that can generate earnings through what basically amounts to a loan that you and others are making to a company or government agency. One of the oldest ways to invest, a bond certifies that the issuer (the comapny needing the loan) has borrowed a specific sum of money and needs to repay the principal and interest to the bondholder (you) by a certain date.

Bonds tend to be more predictable than other investments because the term and the interest rate are known at the time of issuance. Many investors include bonds in their portfolios to provide diversification and balance, and thus reduce the risk. The main attraction of bonds is that they provide a source of fixed income for a defined period of time. If you hold a bond until its payoff date, then you typically will not lose your investment, and you will have earned the stipulated interest, unless the company defaults on the loan.

Bonds that are held as part of a mutual fund can lose money if the fund manager decides to sell the bond before its maturity date. This is usually done when interest rates rise, making it desirable to own the new bond which pays more interest. Unfortunately, they must sell the old bond at a loss (called a discount), and therefore some principal is lost.