BONDS

Bonds are loans made by investors to various bond issuers.

Bonds are a form of debt security. They are IOUs issued by a corporation or government unit when you loan it money. In return for your money, the issuer owes you the amount shown on the face of the bond at maturity, plus interest to be paid periodically. Bonds range in maturity from one to fifty years, though some may have longer maturities.

Bonds are sold to raise money to finance operations and projects. Government units that sell bonds include the federal government and its agencies, and municipal units such as state and city governments.

Bonds are suitable for investors who want current income and need to protect the money they invest (called the principal).

Bonds often pay higher interest than CDs and savings accounts.

Bonds pay the face amount (par) at maturity.

Bonds also may be traded on exchanges. This gives you an opportunity to make capital gains if you sell them to other investors for more than you paid.

Interest on bonds is taxed as ordinary income unless the bonds are tax-free. Bonds issued by most states and their subdivisions are free of federal and state taxes. U.S. Government bonds may be free of state taxes.

Investors who want greater potential returns may choose from the two types of investments that we'll discuss next: stocks and mutual funds.