Bond Basics: What You Own
Bonds come in a variety of forms, but they all share these basic traits.
Bonds can help diversify your portfolio, but they are not risk-free. Find out how bonds work and how to put them to work for you.
Bonds are IOUs issued by corporations, state and city governments and their agencies, and the federal government and its agencies.
When you buy a bond, you become a creditor of the corporation or government entity; it owes you the amount shown on the face of the bond, plus interest. (Bonds typically have a face value of $1,000 or $5,000, although some are larger.) You get a fixed amount of interest on a regular schedule -- every six months, in most cases -- until the bond matures after a specified number of years, at which time you are paid the bond's face value.
If the issuer goes broke, bondholders have first claim on the issuer's assets, ahead of stockholders.
In most cases, you won't receive the actual bond certificate. Bond ownership usually is in the form of a "book entry," meaning the issuer keeps a record of buyers' names but sends out no certificates. Treasury bonds, for instance, are issued in book entry form.
A long-term bond typically matures in 20 to 40 years, although some are issued for shorter periods. A bond that is due to mature in three to ten years is called an intermediate-term bond. Short-term bonds generally mature in three years or less.
After bonds are issued, they can be freely bought and sold by individuals and institutions in what's called the secondary market, which works something like a stock exchange.