Understanding Bonds

These securities help add diversity to your portfolio and control risk. But they can be complicated.

Bonds sound boring, but they're not. Nor are they a nice safe haven for rich and retired folks who never want to lose money. They have a role to play in your investment plan for several important reasons.

First, bonds aren't stocks. Well-selected stocks tend to go up over the long run. But in the short run they can go down, sometimes through no fault of their own. And the very same kinds of things that depress stock prices, such as a recession or sluggish business conditions, tend to boost bond prices. This makes them ideal for diversifying and thus controlling your investment risks.

Second, bonds usually produce a steady stream of income you can reinvest or use for living expenses. The price may go up or down, but barring default on the part of the issuer, the income from a bond remains the same. Plus, municipal bonds can generate tax-free income.

• How Bonds Work
  Understand the concepts of yield, maturity, interest and price.

• What Bond Ratings Mean
  Small investors should stick with high-quality bonds. Here's how to find out how they rate.

• How to Buy and Sell Bonds
  If you follow these tips, you'll be more likely to select good ones.

TYPES OF BONDS

• Zero-Coupon Bonds
  These securities are attractive only to a select few.

• Uncle Sam's Bonds
  For safety, these bonds are the way to go.

• U.S. Agency Securities
  These are close enough to government bonds in terms of safety, but make sure you're aware of the risks.

• U.S. Savings Bonds
  Safety, convenience and tax advantages are the strong points of these securities.

• Municipal Bonds
  The higher your tax bracket, the more you'll benefit from these bonds issued by state and local agencies.

This series is adapted from Kiplinger's Practical Guide to Your Money, by the Editors of Kiplinger's Personal Finance magazine (Kaplan Publishing. Copyright 2005 The Kiplinger Washington Editors, Inc.) Available wherever books are sold or direct at kiplinger.com/store/books.

• Print
• Comments
• Email
• RSS