Understanding Investing

Bonds for Income

Bonds can offer opportunities for attractive levels of income at an acceptable level of risk.

Earning income is an important goal for many investors, and they have often relied on bonds to help them achieve it. Today’s vast global bond market provides investors with many opportunities to pursue attractive income at an acceptable level of risk.

Bond basics
bonds and governmentBonds are issued by governments and companies to raise capital. A bond is like an IOU. When you buy a bond, you are lending money to the issuer, who agrees to pay it back at a specific time, and in most cases, to make regular interest payments along the way. Those payments can provide a valuable source of income for investors at all stages of life.

The most common ways to think about a bond's income potential are coupon rate and yield.

  • Coupon rate: This is the fixed amount an issuer promises to pay each year. The prices of bonds can rise and fall, but the coupon rate remains constant.
  • Yield: This is the rate of income a bond pays based on its current market price. When a bond’s price goes up, its yield comes down, and vice versa.

Finding income in a low yield world
united statesRight now, yields on U.S. Treasury bonds are near record lows, and this challenging environment may be forcing investors to look beyond this traditional source of income. While it is tempting to select bonds with the highest yields, investors need to remember that bonds with higher yields typically entail greater risk, include the risk of falling prices or even default. Investors who choose bonds solely for high yield may be taking on more risk than they had anticipated, so careful research is important in selecting bonds with the right risk/return balance for you.

Investors seeking higher yields may take on more risk than they anticipated.
risk reward chart


A Word About Risk: Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed.

This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. © 2015 PIMCO