Bonds
When you purchase a bond, you are basically loaning money
to a company or the federal or local government, and you are
paid interest for the use of that money during a specified
period of time, generally a few months to 30 years.
If you hang on to a bond until it matures, the issuer guarantees that you will receive the original amount you paid, plus interest. Bonds typically pay better interest than savings accounts or CDs, but you need to make sure you’re loaning your money to a strong, secure company.
There are several different kinds of bonds out there, including:
Government bonds
These are issued by the federal
government. The most common type of government bond is a
savings bond, or treasury bond. These are typically pretty
safe investments, but also yield lower interest rates.
Municipal bonds (also known as “munis”)
This type of bond
is sold by local governments, such as states and cities.
They are often tax exempt, which means you will pay no taxes
on the interest you earn.
Corporate bonds
Corporate bonds are issued by private and
public corporations and are usually issued in multiples of
$1,000 and/or $5,000. The interest payments you receive from
corporate bonds are taxable and, unlike
stocks,
they do not give you an
ownership interest in the company.
Convertible bonds
A convertible bond can be converted into
shares of stock in the company that issues the bond, usually
at a pre-determined ratio.
High-yield bonds (also known as “junk bonds”)
High-yield
bonds are issued by organizations that don’t qualify for
“investment-grade” ratings by one of the leading credit
rating agencies, meaning the issuer is considered to have a
greater risk of not paying interest in a timely manner.
These bonds pay higher interest rates, but are considered
very risky.
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