We can recall that investing is all about spreading risk among various types of assets. One can imagine a portfolio as a pie that is cut into various pieces. These pieces exemplify a different type of assets, e.g. stocks, bonds, commodities, derivatives, alternative investments, real estate, jewelry and even antique art.

Among others, a perfectly diversified portfolio usually comprises of either zero-coupon bonds, accrual bonds, step-up notes, deferred coupon bonds, floating rate securities, deleveraged floaters, inverse floaters, dual indexed floaters, range notes, conventional bonds, serial bonds, amortizing securities, non-amortizing securities or dual currency bonds.

A bond, also called a fixed income security is a promise from the issuer to pay a specific amount of money, called interest payments, to the holder. The bondholder benefits from these debt obligations through principal and interest payments. However, the holder is also exposed to the default risk if the issuer is not able to meet his debt obligations.

The investor receives a so called indenture which is a written contract between the issuer and the bondholder that sets forth the obligations of the creditors. A trustee is the intermediary between the two parties and declares an issuer in default if the issuer fails to meet its obligations.

To calculate return on investment in bonds, one should include maturity, par value, and the coupon rate.