BONDS

When you buy a bond, you become a lender to

whatever entity issued the bond. Typically, the
borrower pays you a certain amount of interest
periodically. When the bond matures, it also
pays you back your initial investment, or the
principal value of the bond.
Bonds have some main characteristics that distinguish them
from stocks:

* Fixed interest rate—Most bonds pay a set rate that never changes.
If a bond has a face value of $1,000 and a 5% interest rate, it pays
$50 per year.
* Maturity date—Some bonds mature after 30 years and some after
one year. But most bonds have a specific end date on which they
repay your initial investment.
 Top-notch bonds are rated “AAA.”
 Low-rated bonds are called junk bonds. They pay
higher interest rates, but because they’re issued by financially
shaky companies, they’re more likely to default.

Features
 Lower risk and lower returns—Bonds generally
return less and are less risky than stocks.
 Harder to buy and sell—Stocks are easy to trade
with any major broker. But it can be hard to buy
individual bonds on your own, and you often
don’t get a great price if you need to sell them.
 TYPES
 Treasuries—Issued by the U.S. federal government. You get
a tax break on your state and local taxes on your interest
income from Treasuries.
 Municipals—Issued by state and local governments and
related entities. You typically get a tax break on your federal
taxes on interest income and sometimes on state and local
taxes as well.
 Corporates—Issued by corporations. There are no tax breaks
on interest income.
 Foreign—Issued by foreign governments or corporations.
The risk and return characteristics of foreign bonds can vary
widely, depending on the particular issuer.
* Liquidity risk—This describes how easy it is to sell your bond for its market
value. Liquid bonds, like Treasuries, are usually easier to sell than illiquid
bonds, such as those from risky companies or small nations.
* Credit risk—Occasionally, a bond issuer runs into serious financial trouble
and can’t pay its debts. (This is called defaulting.) Junk bonds have more
credit risk, while U.S. Treasury bonds have almost no credit risk.
* Interest rate risk—When interest rates rise, bond prices fall and vice versa.
Although bond prices are generally much less volatile than stocks, big rises
in interest rates can (and sometimes do) cause even safe bonds to lose money.
* Inflation risk—Rising inflation can cause interest rates to rise—driving bond
prices down. Low-returning bonds, such as Treasuries, also run the risk of
failing to keep pace with inflation (like if a bond pays 2% interest but
inflation is 3%).

RISK
* Instead of buying individual bonds, many people choose to invest in
bond mutual funds. In a bond fund, the money of many investors is pooled
together, and a professional manager invests it in a diversified array of
individual bonds (often of the same type, e.g., municipal bonds, corporate
bonds, etc.).
The benefits of investing through a fund can include:
Fewer headaches, since a professional is running the show
Less risk if any one bond issuer can’t make its payments, since your
money is typically spread around with hundreds or even thousands of
different bonds
Unlike an individual bond, a bond fund’s periodic interest payments
can vary over time, depending on the performance of each bond within the
fund. And unlike individual bonds, bond funds never mature. Instead,
investors decide when to take their money out or reinvest it.

BOND FUNDS
Bonds usually issued by a government or company to
interested investors. Bonds tend to be safer investments than
stocks. Bondholders typically receive periodic interest payments
and get their principal investments back when a bond matures.

CONCLUSION