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Many Investors ignore bonds in their portfolio. Bonds tend to carry a lower amount of risk, pay interest, and if you own the bond itself, you should recover your investment when the bond matures. Before purchasing a bond or a bond fund, you should understand what you are buying and the risks involved. There can be guarantees, but those guarantees are not always absolute.
 
To learn about bonds study the information on the links below and you could get all the information you want - and more! The following is a summary of the basics behind the bond markets.  


  • U.S. Government debt instruments are considered the safest in the world since the U.S. has never defaulted on its issues. 
     
  • Bond prices move inversely to interest rates. As rates rise, bond prices generally fall. As rates decline, bond prices generally rise. 
  • Corporate bonds are not as secure as U.S. Government Bonds. Because of this, they pay more interest than a U.S. Gov't Treasury. They are rated by various companies.  Although  these ratings guarantee nothing, the highest rated bonds tend to pay the lowest rates.  As the rating of the company falls, the bond yield generally increases. The lowest rate bonds have what is called "junk" status and pay the highest yield.
  • Lower rated bonds and junk bonds tend to be less interest rate sensitive. Their prices are moved by both interest rates and the underlying performance of the company – they could move with the overall value of the company stock.  
  • There are many types of bonds. When buying a bond you really have to understand what you are buying in terms of how it is secured, what its rating is, its maturity and some of the factors that may effect the issuer.
  • Bond mutual funds are more liquid than an individual bond but they never mature. The advantage of the mutual fund is the diversification. The disadvantage is that there is no guarantee that you will get your principal back. If you hold the bond directly, you will get back your principal - if the company is in business.
  • Preferred stocks trade like bonds because they tend to pay fixed rates of interest. There are also variable preferreds where the interest rate changes over time. They would behave like a variable rate bond.

We use bonds for stability in a portfolio and for an added degree of security. If there is a terrorist action or concerns regarding the credibility of the stock market, the treasury bond market tends to rally. 

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