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Bonds are loans made by investors to various
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.
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
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