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Individuals aren't the only ones who borrow money. Corporations, organizations and the government need to take out loans, too. They do this, in part, by issuing bonds to the public.
Here's how bonds work:
Bonds defined
Bonds are I.O.U.s. They're debt instruments issued by corporations and the government to raise money via the public. They're usually sold in increments of $1,000.
When individuals purchase bonds, they're essentially lending money to the issuer with the promise of getting paid the "face value" of the bond when it expires, or matures. On top of that, bondholders get paid fixed interest during the life of the bond, which can range anywhere from three months to 30 years.
All the conditions are laid out, including how much was lent, the interest and the term of the bond.
"When you buy a bond, what you will get is engraved in stone," said Jim Lebenthal, author of Confessions of a Municipal Bond Salesman.
"It is a pact with the issuer that they have to pay you or they go bankrupt."
Who's investing?
"There is room in everyone's portfolio for some type of bond investment," said Michael Decker, senior vice president at the Bond Market Association.
On average, bonds attract the risk-averse -- investors who can't afford to gamble. Because of their relative security and safety as compared with stocks, bonds are often used as savings vehicles for down payments on a home, college education or retirement.
Options
Bonds can come from U.S. government agencies, corporations or state and local governments.
The safest are generally government bonds, called treasuries because they're issued by the Treasury Department.
They include treasury notes, bills and bonds. Some experts call them the "safest in the world."
After all, "the government will always come up with the money to pay you," said John Gannon, vice president of investor education at NASD.
"They have access to tax revenue!"
The ratings
Unlike treasuries, corporate bonds carry default risk, meaning investors can lose their principal if a corporation defaults on a bond. Credit rating agencies like Moody's and Standard and Poor's rate bonds on a scale of AAA (the best) to "junk" status.
Junk bonds are issued by struggling companies, and they carry high risks and, potentially high returns.
Buying
As with stocks, investors can buy bonds through brokers. Prices on more than 20,000 bonds are listed at www.nasd.com/trace
The government also has a Web site, www.treasurydirect.gov , that sells bonds online.
Selling
Before a bond expires, it can be sold on the open bond market. Bond prices fall when interest rates rise, so selling before maturity may come at a loss.
Here's how bonds work:
Bonds defined
Bonds are I.O.U.s. They're debt instruments issued by corporations and the government to raise money via the public. They're usually sold in increments of $1,000.
When individuals purchase bonds, they're essentially lending money to the issuer with the promise of getting paid the "face value" of the bond when it expires, or matures. On top of that, bondholders get paid fixed interest during the life of the bond, which can range anywhere from three months to 30 years.
All the conditions are laid out, including how much was lent, the interest and the term of the bond.
"When you buy a bond, what you will get is engraved in stone," said Jim Lebenthal, author of Confessions of a Municipal Bond Salesman.
"It is a pact with the issuer that they have to pay you or they go bankrupt."
Who's investing?
"There is room in everyone's portfolio for some type of bond investment," said Michael Decker, senior vice president at the Bond Market Association.
On average, bonds attract the risk-averse -- investors who can't afford to gamble. Because of their relative security and safety as compared with stocks, bonds are often used as savings vehicles for down payments on a home, college education or retirement.
Options
Bonds can come from U.S. government agencies, corporations or state and local governments.
The safest are generally government bonds, called treasuries because they're issued by the Treasury Department.
They include treasury notes, bills and bonds. Some experts call them the "safest in the world."
After all, "the government will always come up with the money to pay you," said John Gannon, vice president of investor education at NASD.
"They have access to tax revenue!"
The ratings
Unlike treasuries, corporate bonds carry default risk, meaning investors can lose their principal if a corporation defaults on a bond. Credit rating agencies like Moody's and Standard and Poor's rate bonds on a scale of AAA (the best) to "junk" status.
Junk bonds are issued by struggling companies, and they carry high risks and, potentially high returns.
Buying
As with stocks, investors can buy bonds through brokers. Prices on more than 20,000 bonds are listed at www.nasd.com/trace
The government also has a Web site, www.treasurydirect.gov , that sells bonds online.
Selling
Before a bond expires, it can be sold on the open bond market. Bond prices fall when interest rates rise, so selling before maturity may come at a loss.
