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Bonds

Bonds are IOU notes. There are two main types of bonds, corporate bonds, issued by companies and government bonds, issued by federal, state or local governments and agencies. Bonds promise to pay back a certain amount with a certain time, plus a certain amount of interest, paid at a set schedule or all at the end. When the bond issuer repays the amount plus interest, the bond has reached maturity.

Compared to certificate of deposit(CD) and money market funds, bonds provide more income, because investors typically receive higher yields(interest rate of the bond) on longer term issues(such as bonds) than short term ones(such as CDs). Values of all bonds can fluctuate dramatically when interest rates change. When interest rates rise, bond prices fall. When interest rates fall, bond prices rise. Another risk is credit risk--the issuer may default(unable to pay back interest and the amount borrowed). Rating agencies such as Moody's and Standard & Poor's rate larger bond issues according to their credit risk. These rating information can be found in you local library.

Treasury bonds, notes and bills are issued by the United States Treasury, therefore is considered risk-free. These bonds are the national debt. After all, if the U.S. government collapses and can't pay back these bonds, the dollar bills in your pocket wouldn't be worth anything either. Because of their safety, the yield on treasury bonds are usually lower than that of corporate bonds. The three types of treasury bonds differ in their timeframe. Treasury bills have 13 week, 26 week or one year maturities. The minimum purchase amount is $10,000 and $5000 increments above that. Treasury notes mature in two, three, five, seven and ten years. Notes less than four years sell in $5000 increments. Longer-term notes sell in $1000 increments. Treasury bonds mature in 30 years and are sold in $1000 increments. One advantage of treasury bonds, notes and bills is that you don't have to pay state and local taxes on the interest income. Treasury bills and notes are great places to put your short-term money. You can buy treasury bonds directly from U.S. Treasury or a Federal Reserve Bank through the Treasury Direct program, without paying a commission.

Standard & Poor's and Moody's ratings on a bond before purchase. Remember, higher the yield, greater the risk.

Disadvantage with buying individual municipal or corporate bonds is the high commission. If you want to invest in munis or corporate bonds, consider a bond mutual fund that meet your objectives.