Investment guide
Bonds and Cash: Stability, Yield, and Inflation
Learn how bonds work, how interest rates affect them, and how cash fits into a safe portfolio.
TL;DR
- Bonds provide stability but can lose value when rates rise.
- Cash protects short-term needs but loses purchasing power to inflation.
- A mix of bonds and cash reduces overall volatility.
- Duration is the key risk metric for bonds.
How bonds work
A bond is a loan to a government or company that pays interest over time.
Bond prices move inversely to interest rates, so rising rates hurt longer-duration bonds.
Cash vs bonds
Cash is stable and liquid but often loses value after inflation.
Bonds can offer higher yields, but prices can fluctuate.
Where they fit in a portfolio
Use cash for short-term safety and bonds for medium-term stability.
The mix depends on your goals and risk tolerance.
Understanding duration
Duration measures how sensitive a bond is to interest rate changes.
Higher duration means higher risk when rates rise.
Types of bonds
Government bonds are typically safer; corporate bonds usually pay more.
Investment-grade bonds are lower risk than high-yield bonds.
Bond ETFs add diversification but still carry rate risk.
Inflation and real returns
High inflation can erase the real return of cash and bonds.
Consider inflation protection within your overall allocation.
Action plan
Checklist
FAQ
Are bonds risk-free?
No. Bond prices can fall and issuers can default.
Should I hold cash only?
Cash is safe short-term, but inflation can erode value over time.
Are short-term bonds safer?
Less rate sensitivity, but still credit risk exists.
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