I typically use the terms bonds and fixed income as descriptors for the same thing: bonds. The reason I bring this up is that I've seen other advisors have a broader definition of "fixed income", as in pensions, rental real estate, etc. Basically anything that has a steady income.
For the benefits of this discussion, let's just say both terms mean the same thing.
Most clients understand stocks (ie. you own a share of ownership in a company) or stock mutual funds (ie. you own a share of a mutual fund that owns many shares of many companies). By far the biggest question I get when talking about our investment strategy is to explain a bond or bond fund (fixed income).
High level definition: a bond is debt. It is a loan made to the Federal Government in the form of treasury bonds (quit laughing!), to a state / county or city in the form of municipal bonds or to a company in the form of a corporate bond / high yield bonds. (this can be repeated outside our borders in the form of international/emerging market debt as well)
Let's take a Business as an example: Say Corporation A needs to raise funds for a large facility expansion. They could go to the bank, but the amount in question is to large for a bank loan. They could issue more stock in the market, but that would depress the stock price by diluting the shares (and earnings per share), so they opt for the debt markets and issue a 30 year bond in which they offer to pay a certain interest over those years based on par value of the bond and then in 30 years they will redeem the bond at par value. So essentially you the bond buyer just loaned them money for a state rate of return.
Why invest in bonds? I describe it more as the anchor of your portfolio. Bonds provide a steady income for your portfolio while stocks provide the growth engine.
Is it guaranteed? Should I cash out my CD's and dive in? NO....... A bond is an investment. The prices fluctuate based on market demand, financials of the company, etc. Although the debt markets are many times larger than the stock market, sometimes they can be illiquid to. This means that you may not be able to readily sell your bond until a bidder is found. (not a problem with bond mutual funds)
Can I lose money? Yes..... Read paragraph above. I typically use bond "funds" to minimize the default risk, but if using individual bonds you do have to worry about a company (or government) not being able to pay their interest payment and effectively defaulting. As a bond holder you are higher on the liquidation list so if a company goes bankrupt all the stockholders lose everything. Once the company pieces are sold off after the IRS is paid then bond holders get the rest. Or in the case of restructuring the bond holders are given a large stock ownership in the newly reorganized entity. (think GM , Delta, etc)