Bonds, in the sense of financial instruments, have been in circulation virtually ever since people began to accumulate wealth. The term "bond" in its literal sense means "that with or by which a thing is bound" (source: Oxford English Dictionary) and also means an obligation, a duty, or a covenant between two parties. In the technical and legal sense, it is a deed by which one party agrees to pay an amount of money (or transfer property) to another party under certain conditions and usually within a certain timeframe.

As markets have evolved and become fully internationalized, it is quite impossible for investors to have a personal knowledge of the other party that is being "bound" through the issue of debt instruments such as bonds. Even when the most sophisticated fund managers in the world employ analysts and accountants to quantify the risks involved in purchasing bonds, there are regularly nasty surprises. Investors are expected to make rational risk assessments for the bonds in which they invest, but for all but the most highly-informed investors, this is an extremely difficult task. "Argentina is a sovereign nation and will always repay its debts, right?" Wrong. "The government is supervising the financial system and would never let a bank fail, would it?" Hah. "With so many bankers, accountants and lawyers working with borrowers, everything should have been taken into account so that my money is protected, no?" Wishful thinking. In addition to ingraining the concept of a balanced portfolio in the mind of every investor, there is one other phrase that needs repeating at every turn: no reward without risk...

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