INVESTING In BONDS For A Beginner

Essentially, a bond is a fancy IOU. Companies and governments issue bonds to fund their day-to-day operations or to finance specific projects.

When you buy a bond, you are loaning your money to the issuer - be it General Electric or Uncle Sam - for a certain period of time.

In return, you get interest on the loan, and you get the entire loan amount paid back either on a specific date (known as the bond's maturity date) or at a future date of the issuer's choice. The length of time to maturity is called the bond's term.

Bond investors have a language all their own. A bond's value when it's issued is known as its "par value," and its interest payment is known as its "coupon." For example, a $1,000 bond paying 7% a year has a $70 coupon. Expressed another way, its "coupon rate" is 7%.

It depends on the company, government or agency that's issuing the bond, as well as what the bond's maturity is.

Generally, the less stable the issuer, the higher the interest rate it will pay. That's because the issuer has to make it worthwhile to investors, given the greater risk that a less-stable issuer will default on its bond payments. Treasury bills, issued by the U.S. government, are considered the safest of all.

Typically, the longer the bond's term, the higher the interest rate it will pay.