Final answer:
Bonds are a form of investment that help protect a practice from financial risks by providing recourse in cases of issuer default and allowing for diversification across different issuers and industries to minimize potential losses.
Step-by-step explanation:
Bonds may be purchased to protect a practice from financial uncertainties and risks. A bond, essentially a loan to a company or government, represents a debt obligation that the bond issuer must honor over time, usually by making regular interest payments and repaying the principal at maturity.
When a company issues bonds, it is committing to repaying the borrowed funds plus interest. If the issuer defaults on its obligations, bondholders have some level of recourse; they can demand the company to declare bankruptcy and liquidate assets to recoup their investments. While this does not guarantee full repayment, it offers a layer of protection against total loss. Moreover, investing in a diversified portfolio of bonds, including those from different issuers, can spread the risk and reduce the impact of potential defaults.
For example, purchasing bonds from different sectors can ensure that an investor's portfolio is not overly exposed to the financial health of a single issuer or industry. This strategy is akin to not putting all one's eggs in one basket and can safeguard a practice's financial stability.