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