Bonds are considered less-risky investments because they pay regular interest and return your principal upon maturity. However, bonds issued by companies with poor quality credit may be high-risk investments, having the potential of suspending the interest payments and not repaying the principal. Depending upon changes in the market rate of interest, the value of a bond may fluctuate. If interest rates rise, the bond value will decline, and if the investor needs to sell the bond before its maturity, he may lose money. If interest rates decline, the market value of the bond will rise, possibly giving a profit upon sale.

Features of Bonds

Investing in a bond is the same thing as loaning money to the issuer of that bond. As with any loan, a bond carries an interest rate and a maturity date when the loan must be paid off. Where a bond differs from an ordinary bank loan is in the payment of interest, which takes place twice a year, and in the repayment of principal, which happens only at maturity. Because the interest to be paid is fixed at issue and is paid on a regular schedule, bonds are called Fixed Income Securities.

Bonds are considered less-risky investments than stocks because the principal is paid back at maturity, but the level of risk depends upon the credit quality of the issuer of the bond, which is a reflection of the likelihood that the issuer will pay back the principal in full at maturity. There is also risk from changes in the market interest rates, which may diminish the price a bond will bring if it must be sold prior to maturity. Changes in interest rates also may mean the bondholder is receiving a lower than market rate of interest income.Article Title:

Types of Bonds

Bonds come in a variety of maturities. Interest-bearing securities with maturities of one year or less such as Treasury Bills, Commercial Paper and Banker’s Acceptances are not called bonds. Maturities of two years through nine years are called Notes, and maturities of 10 years and longer are called Bonds. However, many people refer to all Fixed Income Securities as bonds.Article Title: Treasury Bonds

U.S. Treasury Bonds are issued by the United States Treasury and are considered the highest credit quality possible, because the U.S. government can print money to pay the interest and principal. The interest income from these bonds is not taxable for state income-tax purposes. Even though they are the safest bond investments, they are still subject to market-rate risk if they must be sold before maturity.

Corporate Bonds

Corporate Bonds are issued by corporations and can be of high credit quality (AAA or Aaa), medium credit quality (BBB or Baa) or low credit quality (CCC or Caa or below, called Junk Bonds). The interest income from these bonds is fully taxable. These bonds are subject to risk from credit quality as well as market rate.Article Title: Municipal Bonds

Municipal Bonds are issued by states and municipalities and carry credit ratings similar to corporate bonds. The descriptions of these bonds indicate what the funds will be used for and are often an indication of risk. General Obligation (GO) Bonds are normally issued by the state and carry a higher credit rating because of the taxing power of the state. Some common types of Municipal Bonds are Revenue Bonds, Tax Anticipation Notes (TAN) and project financing for schools, utilities and highways. Interest income from these bonds is not taxable for federal income tax but may be taxable for state income tax. These bonds are subject to risk from credit quality as well as market rate.

Mortgage-Backed Bonds

Mortgage-Backed Bonds, or Pass Throughs, are different from straight bonds because they pay principal and interest at regular intervals during the term of the bond and do not pay back the principal in a balloon payment at maturity. Like Corporate Bonds, their credit quality may differ depending on the issuer, but GNMA carries the full faith and credit of the U.S. government, which makes GNMA securities as safe as Treasury Bonds. FNMA and FHLMC had been considered moral obligations of the U.S. government, a slightly lower credit quality than GNMAs, but as a result of the credit crisis that began in 2008 they were given the full faith and credit guarantee and now rank equal to Government Bonds, though a future wise investor should always check that this guarantee remains in effect. These bonds are subject to market rate risk if they must be sold. They also decline in value over time as they begin to return more principal than interest.

How to Buy Bonds

The easiest bonds to buy are those issued by the U.S. Treasury because these are always available for purchase through your bank or online at the Treasury Direct website. Municipal Bonds are normally available for purchase through large banks, brokerage firms and, in the case of some states, online through a website maintained for this purpose. Corporate Bonds can be purchased through a brokerage house.