A bond is a loan that an investor makes to a corporation, government, federal agency or other organization. The bond issuer, or borrower, promises to pay the bond holder, or purchaser, the bond principal on the bond’s maturity date. In addition, the bond issuer compensates the bond holder with interest payments. A bond is a debt instrument also known as a fixed-income security because issuers pay purchaser interest on a regular, pre-determined schedule. US Treasury savings bond are a commonly held bond, with roughly 9% of Americans holding them.
Bonds are seen as being an important part of an investment portfolio because they offer reliable and relatively high level income streams and relatively low levels of volatility. Bonds are useful in diversifying a portfolio or creating a shorter term portfolio.
Certain bonds have tax advantages for investors. The interest on municipal bonds is tax-free on the federal level. If the municipal bond purchaser resides in the state which issued the bond, the interest is typically tax-free on the state level as well. Additionally, the interest from U.S. Treasury Bonds is tax-free on the state and local levels.
The sustainable bond market is growing rapidly. Green bonds, or bonds earmarked for projects with positive environmental or climate effects, issuance increased from roughly $170.7 billion in 2018 to $257.7 billion in 2019. Volumes of sustainability, green, and social bonds can be seen in the graph below.
A library of green bonds issued per month is maintained by the Climate Bonds Initiative. Although sustainable bond purchasers are typically institutional investors, there is a growing number of sustainable bond options for everyday investors available for purchase through brokers or financial advisors.
There are also sustainable bond funds available, including:
- TIAA-CREF Core Impact Bond Fund (TSBIX)
- Domini Impact Bond Fund (DSBFX)
- Parnassus Fixed-Income Fund (PRFIX)
- Calvert Bond Fund (A) (CSIBX)
- Praxis Impact Bond Fund (MIIAX)
- Pax High Yield Bond Fund (PXHIX)
- iShares ESG USD Corporate Bond ETF (SUSC)
Photo credit US Department of the Treasury