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