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One of the key tenets of building a strong portfolio is diversification—investing in different types of assets in order to mitigate risk and see steady long-term growth.

Besides stocks, bonds are a popular asset class which is considered one of the most secure investments one can make. When the stock market is headed for a storm, the bond market can act as a safe haven. Although people talk about stocks a lot more, the bond market is actually quite a bit larger. In 2020 the market cap of the global bond market was about $160 trillion, while the market cap of the stock market was $95 trillion.

The bond market has a long history. The first bonds were issued in the late 1600s by the Bank of England to help raise funds to fight a war against France. Since then, the global bond market has continued to grow and flourish.

So, what exactly is a bond and how does the bond market work?

Why the Bond Market Exists

Just as individuals need to take out loans in order to buy a home or pay for other expenses, governments, cities, and companies also need to borrow money. They can do this by selling bonds, a form of structured debt, and paying a specified amount of interest on them over time.

Essentially a bond is an interest-bearing IOU. An institution might need to borrow millions of dollars, but individuals are able to lend them a small amount of that total loan by purchasing bonds. The reason an institution would choose to issue bonds instead of borrowing money from a bank is that they can get better interest rates with bonds.

Bonds are issued for a specific length of time, called the “term to maturity.” A fixed amount of interest gets paid to the investor every six months or year, and the principal investment gets paid back at the end of the loan period, on what is called the maturity date. In some cases, the interest is paid in a lump sum on the maturity date along with the principal investment funds.

Recommended: How Do Bonds Work?

For example, an investor could buy a $10,000 bond from a city, with a 10-year term that pays 2% interest. The city agrees to pay the investor $200 in interest every six months for the 10 year period, and will pay back the $10,000 at the end of the 10 years.

Bonds are generally issued when a government or corporation needs money for a specific purpose, such as making capital improvements or acquiring another business.

Primary vs Secondary Bond Markets

Bonds are sold in two different markets: the primary market and the secondary market. Newly issued bonds are sold on the primary market, where sales happen directly between issuers and investors. Investors who purchase bonds may then choose to sell them before they reach maturity, using the secondary market. One may also choose to purchase bonds in the secondary market rather than only buying new issue bonds.

Bonds in the secondary market are priced based on their interest rate, their maturity date, and their bond rating, (more on that below). Notes with higher interest rates and more years left until maturity are worth more than those with low rates and those that are nearing maturity.

Differences in Bonds

Bond terms and features vary depending on the type and who issues them. The main types of bonds are:

US Treasury Bills

These government-issued short-term bonds are the safest, but pay the least interest. The sale of treasuries funds all government functions. These bonds are subject to federal income taxes, but are exempt from local and state income taxes.

Recommended: How to Buy Treasury Bills, Bonds, and Notes

Longer-Term Treasury Bills

Bonds such as the 10-year note are the next safest option and pay a slightly higher interest rate.

Treasury Inflation Protected Securities (TIPS)

These bonds specifically protect against inflation, so they pay out a higher interest rate than the rate of inflation.

Municipal Bonds

Also known as muni bonds, these bonds are issued by cities and towns. They are somewhat riskier than treasury bills but offer higher returns. Muni bonds are exempt from federal taxes, and often state taxes as well.

Agency Bonds

Agency bonds are sold to fund federal agriculture, education, and mortgage lending programs. They are sold by Government Sponsored Enterprise (GSE) including Freddie Mac and Fannie Mae.

Corporate Bonds

The riskiest bond types are those issued by companies. The reason they have more risk is that companies can’t raise taxes to pay back their debts, and companies always have some risk of failure. The interest rate on corporate bonds depends on the company. These bonds typically have a maturity of at least one year, and they are subject to federal and state income taxes.

Junk Bonds

Corporate bonds with the highest risk and highest potential return are called junk bonds or high yield bonds. All bonds get rated from a high of AAA down to junk bonds—more on bond ratings below.

Convertible Bonds

Corporate bonds that can be converted into stock at certain times throughout the term of the bond.

Mortgage-Backed Bonds

These bonds consist of pooled mortgages on real estate.

Foreign Bonds

Similar to US bonds, investors can also purchase bonds issued in other countries. These carry the additional risk of currency fluctuations.

Emerging Market Bonds

Companies and governments in emerging markets issue bonds to help with continued economic growth. These bonds have potential for growth but can also be riskier than investing in developed market economies.

Zero Coupon Bonds

Zero coupon bonds don’t pay interest, but are sold at a great discount. Some bonds get transformed into zero coupon bonds, while others start out as zero coupon bonds. Investors earn a profit when the bond reaches maturity because it will have increased in value, and they receive the face value of the bond at the maturity date.

Bond Funds

Investors can also buy into bond funds or bond ETFs, which are groups of different types of bonds collected into a single fund. There are bond funds that group together corporate bonds, junk bonds, and other types of bonds. These funds are managed by a fund manager. Bond funds are safer than individual bonds, since they diversify money into many different bonds.

Bond Indices

Similar to a stock index, there are bond indices that track the performance of groups of bonds. Examples of bond indices include the Merrill Lynch Domestic Master, the Citigroup US Broad Investment-Grade Bond Index, and the Barclays Capital Aggregate Bond Index.

What to Look at When Choosing Bonds

When investors are looking into stocks to invest in, the differences are mainly in the prospects of the company, the team, and the company’s products and services. Stock shares themselves tend to be pretty similar. Bonds, on the other hand, can have significantly different terms and features. For this reason, it’s important for investors to have some understanding of how bonds work before they begin to invest in them.

The main features to look at when selecting bonds are:

Maturity

The maturity date tells an investor the length of the bond term. This helps the buyer know how long their money will be tied up in the bond investment. Also, bonds tend to decrease in value as they near their maturity date, so if a buyer is looking at the secondary market it’s important to pay attention to the maturity date. Bond maturity dates fall into three categories:

•   Short term: Bonds that mature within 1-3 years.
•   Medium-term: Bonds that mature around ten years.
•   Long-term: These bonds could take up to 30 years to mature.

Secured vs. Unsecured

Secured bonds promise that specific assets will be transferred to bondholders if the corporation is unable to repay the bond loan. One type of secured bond is a mortgage-backed security, which is secured with real estate collateral.

Unsecured bonds, also known as debentures, are not backed by any assets, so if the company defaults on the loan the investor loses their money. Both have their benefits and disadvantages, so it is a good idea to understand the difference between secured and unsecured bonds.

Yield

This is the total return rate of the bond. Although a bond’s interest rate is fixed, its yield fluctuates since the price of the bond changes based on market fluctuations. There are a few different ways yield can be measured:

•   Yield to Maturity (YTM): YTM is the most commonly used yield measurement. It refers to the total return of a bond if all interest gets paid and it is held until its maturity date. YTM assumes that interest earned on the bond gets reinvested at the same rate of the bond, which is unlikely to actually happen, so the actual return will differ somewhat from the YTM.
•   Current Yield: This calculation can help bondholders compare the return they are getting on a bond to the dividend return they receive from a stock. It looks at the bond’s current market price and the amount of interest earned on that bond.
•   Nominal Yield: This is the percentage of interest that gets paid out on the bond within a certain period of time. Since the current value of a bond changes over time, but the nominal yield calculation is based on the bond’s face value, the nominal yield isn’t entirely accurate.
•   Yield to Call (YTC): Some bonds may be called before they reach maturity. Bondholders can use the YTC calculation to estimate what their earnings will be if the bond gets called.
•   Realized Yield: This is a calculation used if a bondholder plans to sell a bond in the secondary market at a particular time. It tells them how much they will earn on the bond between the time of the purchase and the time of sale.

Price

This is the value of a bond in the secondary market. There are two bond prices in the secondary market: bidding price and asking price. The bidding price is the highest amount a buyer is willing to pay for a specific bond, and the asking price is the lowest price a bondholder would be willing to sell the bond for. Bond prices change as market interest rates change, along with other factors.

Recommended: What Is Bond Valuation and How Do You Calculate It?

Rating

As mentioned above, all bonds and bond issuers are rated by bond rating agencies. The rating of a bond helps investors understand the risk and potential earnings associated with a bond. Bonds and bond issuers with lower ratings have a higher risk of default.

Ratings are done by three bond rating agencies: Standard & Poor’s, Moody’s, and Fitch. Fitch and Standard & Poor’s rate bonds from AAA down to D, while Moody’s rates from Aaa to C.

Bond Market Terminology

When buying bonds, there are several terms which investors may not be familiar with. Some of the key terms to know include:

•   Liquidation Preference: If a company goes bankrupt, investors get paid back in a specific order as the company sells off assets. Depending on the type of investment, an investor may or may not get their money back. Companies pay back “Senior Debt” first, followed by “Junior Debt.”
•   Coupon: This is the fixed dollar amount paid to investors. For example, if an investor buys a $1000 bond with a 3% interest rate, and interest gets paid out annually, the coupon rate is $30/year.
•   Face Value: Also referred to as “par,” this is the price of the bond when it reaches maturity. Usually bonds have a starting face value of $1,000. If a bond sells in the secondary market for higher than its face value, this is known as “trading at a premium,” while bonds that sell below face value are “trading at a discount.”
•   Duration Risk: This is a calculation of how much a bond’s value may fluctuate when interest rates change. Longer term bonds are at more risk of value fluctuations.
•   Puttable Bonds: Some bonds allow the bondholder to redeem their principal investment before the maturity date, at specific times during the bond term.

The Bond Market and Stocks

Although there is no direct correlation between the bond market and the stock market, the performance of the secondary bond market often reflects people’s perceptions of the stock market and the overall economy.

When investors feel good about the stock market, they are less likely to buy bonds, since bonds provide lower returns and require long-term investment. But when there’s a negative outlook for the stock market, investors want to put their money into safer assets, such as bonds.

How to Make Money on Bonds

While the most obvious way to make money on bonds is to hold them until their maturity to receive the principal investment plus interest, there is also another way investors can make money on bonds.

As mentioned above, bonds can be sold on the secondary market any time before their maturity date. If an investor sells a bond for more than they paid for it, they make a profit.

There are two reasons the price of a bond might increase. If newly issued bonds come out with lower interest rates, then bonds that had been previously issued with higher interest rates go up in value. Or, if the credit risk profile of the government or corporation that issued the bonds improves, that means the institution will be more likely to be able to repay the bond, so its value increases.

Advantages of Bonds

There are several reasons that bonds are a good investment, and they have some advantages over stocks and other assets.

•   Predictable Income: Since bonds are sold with a fixed interest rate, investors know exactly how much they will earn from the investment.
•   Security: Bonds are considered to be a much safer investment than stocks. Although they offer lower interest rates than most stocks, they don’t have the volatility and risk.
•   Contribution: The funds raised from the sale of bonds may go towards improving cities, towns, and other community features. By investing in bonds, one is supporting community improvements.
•   Diversification: Bonds can be a great addition to an investment portfolio because they provide diversification away from stocks. Building a diversified portfolio is key to long-term growth.
•   Obligation: There is no guarantee of payment when investing in stocks. Bonds are a debt obligation that the issuer has agreed to pay.
Profit on Resale: Investors have the opportunity to resell their bonds in the secondary market and make a profit.

Disadvantages of Bonds

Although there are many upsides to investing in bonds, they also have some risks and downsides. Like any investment, it’s important to do research before buying.

•   Lack of Liquidity: Investors can sell bonds before their maturity date, but they may not be able to sell them at the same or higher price than they bought them for. If they hold on to the bond until its maturity, that cash isn’t available for use for a long period of time.
Bond Issuer Default and Credit Risk: Bonds are fairly secure, but there is a possibility that the issuer won’t be able to pay back the loan. If this happens, the investor may not receive their principal or interest.
•   Low Returns: Bonds offer fairly low interest rates, so in the long run investors are likely to see greater returns in the stock market. In some cases, the bond rate may even be lower than the rate of inflation.
•   Market Changes: Bonds can decrease in value if the issuing corporation’s bond rating changes, if the company’s prospects don’t look good, or it looks like they may ultimately default on the loan.
•   Interest Rate Changes: One of the most important things to understand about bonds is that their value has an inverse relationship with interest rates. If interest rates increase, the value of bonds decreases, and vice versa. The reason for this is that if interest rates rise on new bond issues, investors would prefer to own those bonds than older bonds with lower rates. If a bond is close to reaching maturity it will be less affected by changing interest rates than a bond that still has many years left to mature.
•   Not FDIC Insured: There is no FDIC insurance for bondholders. If the issuer defaults, the investor loses the money they invested.
•   Call Provision: Sometimes corporations have the option to redeem bonds. This isn’t a major downside, but does mean investors receive their money back and will be able to reinvest it.

How to Buy Bonds

Bonds differ from stocks in that they aren’t traded publicly. Investors must go through a broker to purchase most bonds, or they can buy US Treasury bonds directly from the government.

Brokers can sell bonds at any price, so it’s important for investors to research to make sure they are getting a good price. They can also check the Financial Industry Regulatory Authority (FINRA) to see benchmark data and get an idea about how much they should be paying for a particular bond. FINRA also has a search tool for investors to find credible bond brokers.

As mentioned above, traders can either buy bonds in the primary or secondary market, or they can buy into bond mutual funds and bond ETFs.

Get Started Buying Bonds

For those looking to start investing in bonds, stocks, and other assets, there are many great tools available to help. One easy way to start buying into the bond market is using SoFi Invest’s® online investment tools. SoFi has an easy-to-use app investors can use to buy and sell bond funds with a few clicks of a button and keep track of their favorite bond funds and stocks, research specific assets, and set personalized financial goals.

Buying into bond funds is a good way for investors to gain exposure to a diversified portfolio of bonds, rather than going through the complex process of choosing individual bonds.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, LLC and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
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Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

After years of law school, internships, landing a job at a law firm and working to climb the ladder, some lawyers decide they’re ready to change careers. But, they might wonder, how easy will it be to make a switch?

Fortunately, pivoting after law school may be easier than it used to be, and there are some great alternative careers for lawyers out there—if you know where to look and how to position yourself.

Reasons Lawyers Might Consider Making a Career Switch

It might seem surprising that a lawyer would want to make a career change, after all the years they’ve spent studying and preparing, but it’s not actually uncommon. While TV and film can make it seem like practicing law is a thrilling blend of opening and closing arguments and life-changing verdicts passed down by a jury, there are plenty of mundane tasks in the mix.

In some cases, legal work can be relatively dull. Instead of high stakes court cases, it can be a lot of reading, research, and paperwork. Sometimes the work can be isolating as a lot of time is spent working alone.

Beyond that, lawyers can face a ton of pressure at work, which can lead to a stressful day-to-day work environment. Lawyers have a lot on their plates: tracking deadlines, handling client demands, staying on the partner track, keeping up with the changing laws and regulations, and more.

Not only can the stress of the job be exhausting, getting the job done can require long hours. And at most law firms, lawyers are measured by billable hours. Not how many hours the lawyers actually work, and not the quality of the work, but how many hours they can bill to a client.

Combine that with the fact that oftentimes a lawyer’s schedule is out of their control, dictated by the courts or bosses at a firm, it’s no wonder some lawyers are interested in trying something new.

A career in law, or even a career change to a lawyer, might be worth it for a great paycheck. However, the U.S. Bureau of Labor Statistics reports that the median annual pay for a lawyer in 2021 was $127,990 per year—which means half of the lawyers out there are making less than that. And when you’re dealing with law school debt, that could make for a difficult financial balancing act.

Some law school graduates may decide they could make a decent living and enjoy themselves more in a different profession. And so, they might choose to become a second-career lawyer.

So How Can You Prepare Your Exit Strategy?

Leaving a career as a lawyer can be a huge decision. If you’re considering making a career switch — whether you’re considering a career change to law or a career change out of law — you might want to think about preparing an exit strategy. Here are some ideas for planning ahead as you think about making the jump from lawyer to the new career of your choice.

Aggressively Paying Off Student Loan Debt

If you have solid credit and a good job (among other factors), you may qualify for a better interest rate and/or terms with a private lender.

Having a lot of student debt hanging over your head might limit your options. Student loan refinancing could be a good choice for those who have higher interest, unsubsidized Direct Loans, Graduate PLUS loans, and/or private loans.

When should you refinance your student loans? Now might be the right time if you have solid credit and a good job (among other factors). Those things could help you qualify for a better interest rate and/or more favorable terms with a private lender that might help you get out from under that student debt faster.

This student loan refinance calculator can show you how much refinancing might save you.

However, it’s important to be aware that federal loans carry some special benefits that are not accessible if you refinance them into a private loan—such as income-driven repayment. Make sure you won’t need to use these federal programs before refinancing.

Recommended: Student Loan Refinancing Guide

Creating a Budget and an Emergency Fund

Lawyers tend to make pretty decent money right out of the gate (the problem typically comes later when income can start to stagnate), so it may be wise to avoid spending those years letting your lifestyle rise to the level of your income. Instead, put together a budget that allows you to save for the future.

Another wise idea is to start building an emergency fund. If you think your salary will take a hit should you leave the law, that fund could help tide you over until you firmly establish yourself in your new career.

Using Your Time as a Lawyer to Make Connections

As a lawyer, you’ll likely come into contact with people in a variety of different fields. Building professional relationships and keeping them going could pay off when you start putting out feelers. When you approach them, be courteous and respectful of their time, and if you decide to ask someone for help with your new career path, be clear about what you want—advice, an introduction, or a lead on a job.

Recommended: Law School Loan Repayment and Forgiveness Options

Planning Ahead

Try moving your focus from what you don’t like about your current job to how you might transfer your knowledge, skills, and passion to a new career. Lawyers can make good researchers and investigators, compliance professionals, business analysts, real estate professionals, executives, and entrepreneurs. Some go into law enforcement. Others might end up in the media or communications.

Can You Have a Non-Legal Job With a Law Degree?

It’s absolutely possible to make a career change to a non-legal job if you have a law degree. In fact, a law degree can speak volumes about your knowledge, skills, and work ethic. It can help to show that you’re analytical, organized, and good at project management. Plus, you’re aware of the potential legal ramifications of business decisions, which can be very helpful to almost any company.

Probably the biggest hurdle for most people is simply giving up the idea of being an attorney. But if you can open your mind and look at all the other options, you may find something that makes you even happier.

When you’re ready to make the new-career move, refinancing your student loans could help you get your student debt under control so you can more easily move forward. SoFi offers loans with low fixed or variable rates, flexible terms and no fees. Plus, you can find out if you prequalify in just two minutes.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

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