Add Balance with Bonds

Bonds can help balance your portfolio, but they are not risk-free. Find out how bonds work, and how to put them to work for you.

April 6, 2003

Bonds belong in your investment plan for good reasons, but maybe not for the reasons you think:

• Economic forces that depress stock prices
  -- the early stages of a recession, for instance -- tend to boost bond prices.
  
  
• Bonds can generate impressive profits from capital gains. As we will point out, sometimes you can even calculate those gains years in advance on the day you buy the bonds.
  
  
• Bonds can provide a predictable stream of relatively high income you can use for living expenses or for funding other parts of your investment plan.
  
  
• Some kinds of bonds offer valuable tax advantages and unparalleled opportunities to take advantage of the time value of money, that is, to invest a modest amount with a reasonable prospect of collecting a large amount a few years later.
  
  

Note that the word "safety" doesn't appear in this list. A lot of people think bonds are about the safest investment around, but as you'll see, such a notion can be costly. In this tutorial you'll learn ...

• How Bonds Work
  Bonds are IOUs from companies, governments and their agencies. Here's a brief introduction to the world of bonds.
  
  
• Types of Bonds
  Not all bonds are created equal. From agencies to zero-coupons, learn the basics behind a variety of bonds.
  
  
• Unlocking the Potential of Bonds
  You'll know how much interest you'll receive from the beginning, but you can also profit from price moves on the secondary market.
  
  
• Riding the Yield Curve
  This simple relationship between long- and short-term interest rates can tell you a lot about the bond market.
  
  
• How to Reduce the Risks in Bonds
  Bonds have risks you won't find in other types of investments. Find out how to spot risky bonds and how to avoid them.
  
  

How Bonds Work

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