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The Bond Market and How you Can Benefit

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 andfluctuates daily) though still receiving the
disadvantages, both should be included insame coupon. A bond's "total return" is all
your portfolio. As a general rule, stocksthe money you will earn off of the bond. That
have outperformed bonds since 1926; returningincludes the annual interest along with its
10.4 percent against government bonds' 5.4loss  or  gain  in  the  market.
percent  showing.
Bountiful  Bonds
However, when stocks go badand they willbonds
will always be there for you. Over shortThere are a ton of bonds to choose from, but
periods of time (like the bear market of 2000the safest choice is a U.S. Treasury.
to 2002) bonds easily outpaced the growth ofInterest and payments on these are guaranteed
stocks. However the world of bonds can be aby the "full faith and credit" of the United
confusing one, so let's learn a little moreStates  Government.
about  them.
Within Treasuries, there are several bonds to
Why  to  get  fond  of  bondschoose from, all requiring different
investment commitments, terms, and interest
The first word in smart investing isrates.
"diversification". That means you own a good
mix of volatile stocks and steady bonds inYou can also choose from mortgage-backed
your portfolio. When one takes a hit, thebonds, 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 liquidMost of these are issued in $1,000
results when you sell, bonds pay interestdenominations and have terms ranging form one
regularly, making them an attractiveto 20 years, or even a few weeks to 100
investment choice for retirees looking foryears. 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 safestproposition  when selecting a corporate bond.
investment choices you can make, second only
to cash. U.S. Treasuries offer a risk-freeFinally, you can also purchase municipal
vehicle of stashing funds for a limitedbonds in state and local governments and
amount of time, and you'll usually see modestagencies. 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'smunicipal bonds is that your interest returns
tax-free. That's a good thing, even thoughare typically exempt from most federal,
most of these pay a lower yield than what youstate,  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 basicallystocks, there are still risks. Interest
lending money to a corporation or thepayments can be worn by inflation. If
government so they can go about theirinterest rates rise, bond prices will fall.
everyday business or complete certainAlso, 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'vehappens, you'll only get "par value" on the
invested once the bond "matures", meaning itsbuy 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. AFinally, bonds, as with most investments, are
"coupon", is what the bond pays annually inat the mercy of the ups and downs of the
interest. For example, a $10,000 bond payingeveryday 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 beunpredictable it becomes.
purchasing from another person in the



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