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<p>Bonds can be part of a well-diversified portfolio. Basically, when you own a bond you're lending money to a company or the government. They, in turn, promise to pay an agreed upon rate of interest (known as the coupon rate) over the term of the loan and then repay the total loan amount (known as the face value) by the end of the loan term (known as the <glossary>maturity date</glossary>). Unlike the holder of a stock, bond holders do not have ownership of the company. Instead, they are said to own a debt and are a creditor of the company.</p>
<p>Because the amount that is to be paid back at the end of the bond's term is a fixed amount, the value of a bond is much less volatile than that of a stock. Because of this lower amount of volatility, bonds are generally considered less risky than stocks. They are a good choice when you're most interested in maintaining your principal and earning some interest. Bonds can usually be bought and sold, just like stocks. Be aware that bond prices will fluctuate based on interest rates, the credit worthiness of the company or government entity that issued the bond, and other factors.</p>
<p>Investors can choose from many different types of bonds. Consult with your financial advisor to determine which bonds are right for you.</p>
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<tease>Corporate bonds</tease>
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<p>Corporate bonds are bonds issued by a corporation (including convertible bonds). Maturity varies, from short term (1 to 5 years), to intermediate (5 to 10 years), to long term (10 or more years). They are generally bought through brokers and are rated by organizations such as Moody's and Standard & Poor's. Interest on these bonds is almost always taxable. Corporate bonds are often issued with <glossary>call</glossary> provisions. This means that the company issuing the bond may call the bonds in from the investors at some preassigned future date for the purpose of either paying off the bonds entirely or refinancing the debt at a lower interest rate. Although bonds issued by corporations are considered to be more risky than government bonds due to a higher credit risk, they generally have a higher yield for the same reason.</p>
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<tease>Municipal bonds</tease>
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<p>Municipal bonds are issued by state or local governments, primarily for special projects. Maturities range from 1 month to 40 years. They are generally purchased through brokers and are rated by organizations such as Moody's and Standard & Poor's. These bonds are often issued with <glossary>call</glossary> provisions. This means that the municipality (such as city or state) issuing the bond may call the bonds in from the investors at some preassigned future date to either pay off the bonds entirely or to refinance them at a lower interest rate. Because of their tax-exempt status, municipal bonds often have a lower interest rate than other types of bonds with the same length of maturity. This tax-exempt status makes them especially attractive to investors in high tax brackets.</p>
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<tease>Treasury bonds and treasury notes</tease>
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<p>Treasury bonds and treasury notes are bonds backed by the U.S. government. Treasury bonds (T-bonds) are long-term securities with maturities of 10 years or more. Treasury notes (T-notes) are medium-term securities with maturities of 1 to 10 years. Investors often buy new T-bonds and T-notes as they are issued during auction (at any Federal Reserve bank). Outstanding bonds and notes can be bought through a broker. These bonds generally are not rated for risk because they are backed by the government and considered to be the least risky bonds you can buy. Because of the low risk, they usually offer a lower interest rate. Investors living in areas with state and local income taxes usually don't have to pay these taxes on the interest from treasury bonds and notes.</p>
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<tease>Treasury bills</tease>
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<p>Treasury bills are short-term, popular investments that money markets buy because of their short maturities of 3, 6, or 12 months. Investors buy new T-bills as they are issued during auction (at any Federal Reserve bank). Outstanding T-bills can be bought through a broker. T-bills are considered risk-free and are exempt from state and local taxes. These are short-term investments that offer no periodic interest payments. Investors receive a profit from the difference between the discounted T-bill purchase price and the amount paid at maturity. Usually a large minimum investment is required.</p>
<p>T-bills differ from savings bonds in that they are short term and offer a higher level of principal safety. Unlike a savings bond, they can be sold.</p>
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<tease>Ginnie Mae, Fannie Mae, and Freddie Mac</tease>
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<p>Ginnie Mae, Fannie Mae, and Freddie Mac are mortgage-backed securities that range from 30 days to 30 years. These investments draw from a pool of mortgages, much like a mutual fund that owns stocks. Investors lend to homeowners. Each of these investments can be bought through brokers or banks or over the counter. Some are rated by organizations such as Moody's and Standard & Poor's. Interest paid to investors is fully taxable. Because they represent a pool of mortgages, they have no <glossary>call</glossary> provision, but some of the homeowners who make up the pool of mortgages may choose to refinance their homes, which pays principle back to the investor at a faster rate than planned. Mortgage-backed securities have a marginally higher risk and higher interest rate than treasury bonds and notes.</p>
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<tease>U.S. Savings bonds</tease>
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<p>U.S. Savings bonds are government-issued bonds. The rate of interest the bonds pay and the length of time until they mature depends on the type of savings bond and when they are issued. They are bought in denominations of $50 to $10,000. U.S. Savings bonds are not traded on the open market. Interest from this type of bond is exempt from state and local taxes, and investors can choose to defer federal income tax on interest from Series EE or Series I bonds until they're redeemed. Investors earn money by purchasing Series EE bonds at a discount from the face value, and then, when the bond matures, the investor receives the entire face value. Series HH and Series I bonds are purchased at face value, and pay interest until maturity. Taxpayers who meet income qualifications can use these bonds to save for higher education expenses, with a total or partial exemption from federal taxes.</p>
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<tease>Zero-coupon bonds</tease>
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<p>Zero-coupon bonds pay no interest but are sold by a corporation or government entity at a deep discount from their face value. Even though no interest is received over the term of these bonds, the IRS expects taxpayers to pay annual interest on a portion of interest assigned to each year of holding the bonds even though taxpayers do not receive the cash until maturity.</p>
<p>For example, an investor buys a zero-coupon bond that has a face value of $10,000 and matures in 10 years. The investor pays $5,500 for the bond. In 10 years, she will receive $10,000, earning $4,500 in interest income. For tax purposes, the gain of $4,500 is averaged over 10 years, so each year the investor would claim $450.00 in interest income. It is called phantom income because the investor has to pay taxes on it even though she will not actually receive the income until the bond matures.</p>
