Bonds as an Investment

Of the various forms of investment vehicles, bonds are a way to invest by loaning money to an entity such as a corporation or the government, whether federal, state or local. In return for your loan, you may receive interest at a fixed rate for a fixed period of time. The period of time can range anywhere from a few months to over 20 years. When the bond matures (the specified time period is over), you receive your original investment amount back. With some types of bonds, such as U.S. savings bonds or zero coupon bonds, you get all your interest when the bond matures because you buy the bond at a discounted price and receive the full face value when it matures.

In general, when interest rates go up, bonds decrease in value. Conversely, when interest rates go down, bonds are more valuable because their interest rate is higher than the interest rate available for other investments. Therefore it is important to understand that the economy has a big impact on the value of bonds as an investment.

Investing in bonds carries varying degrees of risk depending on the type of bond you invest in. Therefore, the right type of bond investment will vary depending on the age and stage of your life. In addition, your income tax situation may influence your investment decision because the interest from certain bonds (municipal bonds) is not taxed at the federal or state or local level.

Tip

Many investors invest in bonds through mutual funds. Mutual funds are professionally managed and also make it easier to diversify your investments. You still have to do your homework and determine what type of bonds will best suit your investment goals, but the average investor finds it less stressful to invest in this manner.

Bonds are securities and therefore most types of bonds can be purchased through securities brokers.

In this section we discuss the different types of bonds. Also included is a discussion of how to pick among the bonds available:

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