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The Bond Market

The bond market is a diverse, mixed use, realm of investment opportunities that range from solidly secure, well managed instruments to high yield, complicated, and risky devices.

Bonds are legal instruments of credit that come in many forms such as municipal, treasury, junk, savings, zero-coupon, corporate, etc., in which a sum is agreed to be paid to the holder at a designated time in which certain conditions are applied.

Bonds are bought and held for their value as an investment, garnering interest over a period of time while maintaining their purchase or face value. What makes them attractive is that they may be sold freely by, or to, investors, through banks, brokers, clearing houses, governmental agencies, and corporations.

Most bonds offer a higher yield than savings accounts and, depending on the type of bonds, may not be as volatile as investing in the stock market.

There are many types of bonds and the bond market is a time honored way of investing for the future.

  • Savings bonds, although you don't hear that name mentioned to often anymore, are backed by the federal government and are only taxed when they have matured. Savings bonds are safe as investments but they pay slightly less interest than other types of bonds.
  • Treasury bonds are probably the most secure of all bonds because they are basically loans to the federal government by the investor and are backed by the federal government.
  • Municipal bonds are issued by state governments, cities, counties, townships, and some school districts. Municipal bonds are usually bought as tax shelters. Investors earn interest payments on them while avoiding paying tax on their return.
  • Corporate bonds are sold by companies as a way to raise and use investors money by promising to pay interest on the funds and guarantying the money be paid back in full at a specific time in the future.
  • Junk bonds or high yield fixed income securities are bonds that do not carry a B or lower rating. Junk bonds are risky, but they offer investors a much higher yield on their money than A rated bonds.
  • Convertible bonds are issued by companies that promise investors a fixed rate of income. Convertible bonds have stock like qualities in which an option is given to the investor to exchange the bonds for a shares of company stock. This gives the investor the opportunity to make gains if the company's stock goes up in value.

There are other types of bonds and many of them make good investment sense, but like anything else, there are opportunities for pitfalls. Before investing in bonds, you should know and understand definitions and phrases like yield, maturity, and par value.

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