Bonds are loans you make to corporations or governments. Unlike buying stocks,or equity securities, which make you a part-owner in a company, buying bonds, or debt securities, makes you a creditor.

Bonds are called fixed-income securities because they usually pay a specified amount of interest on a regular basis. However, one of their limitations for individual investors is their cost. Few sell for less than $1,000, and it's often hard to buy just one. For some people, investing in a bond mutual fund may be an alternative, though funds do not pay a fixed rate of interest or promise return of principal.
 
TYPES OF BONDS
Type Description Features
Corporate Bonds
Corporation 		Bonds are the major source of corporate borrowing. Debentures are backed by the general credit of the corporation. Asset-backed bonds are backed by specific corporate assets like property or equipment.
Bullet Bought through brokers
Bullet Interest fully taxable
Bullet Top-rated bonds pose less risk of default than lower-rated bonds
Bullet Higher-yielding bonds more volatile than those with lower yields
Municipal Bonds
Municipal 		Millions of bonds have been issued by state and local governments. General obligation bonds are backed by the full faith and credit of the issuer, and revenue bonds by the earnings of the particular project being financed.
Bullet Bought through brokers
Bullet Generally pay lower interest rates than comparably rated corporate bonds and US Treasury's
Bullet Interest federally tax exempt, though potentially subject to alternative minimum tax (AMT)
Bullet Some bonds are insured, others are not
US Treasury Notes and Bonds
Treasury 		Notes with terms of 2, 3, 5, or 10 years are a major source of government funding. 30-year bonds issued before 2001 still trade in the secondary market, and new issues resumed in 2006.
Bullet Bought through US Treasury or through brokers
Bullet Highest credit quality
Bullet Lower interest rates than comparable corporate bonds
Bullet Sold in $1,000 units
US Treasury Bills
Treasury 		Largest components of the money market, where short-term (4-, 13-, and 26-week) securities are bought and sold. Investors use T-bills for part of their cash reserve or as an interim holding place. Interest is the difference between the discounted buying price and the amount paid at maturity.
Bullet Bought through US Treasury or through broker
Bullet Direct purchase allows reinvestment for up to two years without a new application
Bullet Maximum safety, but typically lower return than longer-term notes
Bullet Sold in $1,000 units
Agency Bonds
Agency 		Federal, state, and local agencies sell bonds. The best known are mortgage-backed bonds sold by Ginnie Mae (Government National Mortgage Association).
Bullet Bought directly through banks or from brokers
Bullet Potentially higher risk and higher interest than Treasury bonds
Bullet Prices vary widely from $1,000 to $25,000 and up
 
The going interest rate at Treasury auctions and the price of 10-year notes in the secondary market are used as benchmarks of investor attitudes toward the economy.

INVESTMENT-GRADE BONDS
High-quality, or investment-grade, bonds are considered conservative investments because you can be reasonably confident of getting regular interest payments plus the face, or par, value of the bond when it matures.

Treasury issues are considered as extremely safe, though their market value fluctuates in response to changes in the interest rate and could be less than par value if you sold before maturity. The timely payment of interest and repayment of principal are backed by the "full faith and credit" of the government, which has the power to tax its citizens to pay its debts.

Corporate and municipal bonds are evaluated by independent rating services - the best known are Standard & Poor's, Moody's Investors Service Inc., and Fitch - which measure the financial stability of the issuer and assign a rating - from AAA to D. Any bond rated Baa or higher by Moody's, or BBB or higher by Standard and Poor's, is considered investment quality. Usually, the higher a bond's rating, the lower the interest rate it must pay to attract buyers.

Junk Bonds WHAT ARE JUNK BONDS?
Investors willing to take the risk of default to receive high yields may buy corporate or municipal bonds with low ratings - or no ratings at all. These are commonly known as junk bonds.

AVOIDING COMMISSIONS ON TREASURYS
The cheapest way to buy US Treasury issues is to buy them directly from the government. You open an account and place your orders without fee. The system simplifies the investment process by storing records of the issues you own and depositing your interest and principal electronically in your bank account. Using this system, you can also reinvest your Treasury bills for up to two years using the mail, the telephone, or online at www.treasurydirect.gov.
Governments and corporations around the world also sell bonds that US investors can buy. Some of them are called "yankee bonds," and are sold in US dollars.

SAVINGS BONDS: TRIED, TRUE, AND
BETTER TOO
You can buy US savings bonds - up to $30,000 per person a year - online, from banks, or through payroll deductions.
  • They're inexpensive - for some bonds you can invest as little as $25 - and get a guaranteed rate of interest. You must own the bonds at least a minimum period.

  • There's no commission, and no state or local tax on the interest. Plus, you don't owe federal taxes until you redeem the bond. You may be able to avoid taxes entirely if you use the bonds to pay for your child's education, though you'll have to check the purchase and income conditions that apply.

 

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