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The Basics of Investing in 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.

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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.

Getting Started Understand the concepts of yield, maturity, interest and price.

What the 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.

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What You Own Bonds come in a variety of forms, but they all share these basic traits.

Pick Your Type Not all bonds are created equal. From agencies to zero-coupons, learn the basics behind a variety of bonds.

The Relationship Between Yield and Price 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 Bonds have risks you won't find in other types of investments. Find out how to spot risky bonds and how to avoid them.

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.

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