| In the investment world, there are two words | | | | "secondary" market, and you'll pay the |
| we hear more than any othersstocks and bonds. | | | | current market price on the bond (which |
| While each can offer their own advantages and | | | | fluctuates daily) though still receiving the |
| disadvantages, both should be included in | | | | same coupon. A bond's "total return" is all |
| your portfolio. As a general rule, stocks | | | | the money you will earn off of the bond. That |
| have outperformed bonds since 1926; returning | | | | includes the annual interest along with its |
| 10.4 percent against government bonds' 5.4 | | | | loss or gain in the market. |
| percent showing. | | | | |
| | | | Bountiful Bonds |
| However, when stocks go badand they willbonds | | | | |
| will always be there for you. Over short | | | | There are a ton of bonds to choose from, but |
| periods of time (like the bear market of 2000 | | | | the safest choice is a U.S. Treasury. |
| to 2002) bonds easily outpaced the growth of | | | | Interest and payments on these are guaranteed |
| stocks. However the world of bonds can be a | | | | by the "full faith and credit" of the United |
| confusing one, so let's learn a little more | | | | States Government. |
| about them. | | | | |
| | | | Within Treasuries, there are several bonds to |
| Why to get fond of bonds | | | | choose from, all requiring different |
| | | | investment commitments, terms, and interest |
| The first word in smart investing is | | | | rates. |
| "diversification". That means you own a good | | | | |
| mix of volatile stocks and steady bonds in | | | | You can also choose from mortgage-backed |
| your portfolio. When one takes a hit, the | | | | bonds, which can yield around 1 percent more |
| other will usually hold steady. | | | | than Treasury bonds with a typical $25,000 |
| | | | investment. Then there are corporate bonds. |
| Whereas stocks will only give you liquid | | | | Most of these are issued in $1,000 |
| results when you sell, bonds pay interest | | | | denominations and have terms ranging form one |
| regularly, making them an attractive | | | | to 20 years, or even a few weeks to 100 |
| investment choice for retirees looking for | | | | years. The values of corporate bonds depend |
| regular income. | | | | on the credit of the company you're bonding. |
| | | | Like everything else, it's a risk-reward |
| Bonds are also some of the some of the safest | | | | proposition when selecting a corporate bond. |
| investment choices you can make, second only | | | | |
| to cash. U.S. Treasuries offer a risk-free | | | | Finally, you can also purchase municipal |
| vehicle of stashing funds for a limited | | | | bonds in state and local governments and |
| amount of time, and you'll usually see modest | | | | agencies. These are usually available in |
| gains while you're at it. | | | | denominations starting at $5,000, with terms |
| | | | of 30 to 40 years. The great thing about |
| Also, many bonds provide income that's | | | | municipal bonds is that your interest returns |
| tax-free. That's a good thing, even though | | | | are typically exempt from most federal, |
| most of these pay a lower yield than what you | | | | state, and local taxes. |
| might get from taxable bonds. | | | | |
| | | | Risk-Reward |
| Bonds at work | | | | |
| | | | Though bonds are typically less volatile than |
| When you purchase a bond, you're basically | | | | stocks, there are still risks. Interest |
| lending money to a corporation or the | | | | payments can be worn by inflation. If |
| government so they can go about their | | | | interest rates rise, bond prices will fall. |
| everyday business or complete certain | | | | Also, some bond issuers reserve the right to |
| projects. In return, they pay you interest | | | | "call" back bonds before term. If this |
| annually and then give back what you've | | | | happens, you'll only get "par value" on the |
| invested once the bond "matures", meaning its | | | | buy back, though "callable" bonds offer |
| term ends. | | | | higher interest returns than noncallable |
| | | | bonds. Also, if a corporation you have bonded |
| Now for a little lingo. A bond's "par value" | | | | goes belly-up, say goodbye to your money. |
| is the price paid for it when it was new. A | | | | Finally, bonds, as with most investments, are |
| "coupon", is what the bond pays annually in | | | | at the mercy of the ups and downs of the |
| interest. For example, a $10,000 bond paying | | | | everyday market. Just remember, the longer |
| 8 percent a year would have a coupon of $800. | | | | before your bond matures, the more |
| If you don't buy a bond new, you'll be | | | | unpredictable it becomes. |
| purchasing from another person in the | | | | |