Have you ever sat and pondered how understanding debt securities could make a difference in your life (or, at least if not your life, then your bank account)? Does this question give you many fitful, sleepless nights? I'm assuming not. I hope not, actually. In reality, few novice investors have any idea what debt securities are and what you're supposed to do with them.

Basically, debt securities are bonds. A bond is simply a financial instrument issued by a company or government that investors buy. The bond pays a fixed income and the amount the investor paid for the bond will be returned when the bond expires. Bonds can also be traded on the secondary market. To make it really basic, whoever buys the bond is making a loan to the bond's issuer and the issuer makes interest payments until they have to pay the principal back. Have you ever had a loan? It's the same thing as that, except this time you're the one making money off the loan interest, not the other way around.

Bonds sound boring. They are boring. Bonds sound insignificant. They are definitely not insignificant. The bond market is actually much, much larger than the stock market in terms of the total dollars traded. It seems a bit shocking because so much media attention is given to stocks and so little to bonds. Why is that? Well, I already answered that. Bonds are boring.

They are lower risk, lower return investment vehicles that can help balance an investment portfolio that contains some other higher risk investment instruments, such as stocks. For example, Canada Savings Bonds, a traditionally popular bond issued by the federal government of Canada, has a 0.50 per cent interest rate. This is incredibly low, so low that Canada Savings Bonds have largely fallen out of fashion. Bonds can also be issued by corporations, provincial governments and municipalities, and interest rates are usually a few points higher than the example I've given with Canada Savings Bonds.

There are still risks with bonds, though. If you invest in corporate bonds and the company you invested in goes bankrupt, as a bondholder you have preference to the liquidation of the company's assets. But if the bankrupted company doesn't have enough assets to pay you off, you're out of luck. However, with bonds this risk is quite small, so this balance of risk and reward is the main attraction, particularly among older, conservative investors who do not want to risk their retirement savings in volatile stocks or mutual funds.

One of the most accessible ways of investing in bonds is to purchase a mutual fund that invests in bonds, rather than purchasing various bonds individually. This way you have to focus more on researching the fund rather than researching a ton of different bonds, which is a daunting task even for an experienced financial professional. Bonds are not the most thrilling financial instrument on the planet, but they are an important cornerstone of a wellrounded investment portfolio and any investor should understand the risks and drawbacks of bonds before deciding whether to invest in them.

If you want more information on what is currently going on in the bonds market, bloomberg.com is an excellent all-around financial news web site.

Jeremy Wall is studying Professional Financial Services at Fanshawe College. He holds an Honour's Bachelor of Arts from the University of Western Ontario.