If you are a beginning investor, you may be asking, how do bonds work? There are many different bonds that work in different ways, but you are essentially lending money to an entity when you buy bonds.
Bond Basics
You can buy bonds from a city, a state, a branch of the US government or a corporation. In return, you will receive interest on the money you invested, paid out in pre-designated increments at a pre-designated rate of interest. After a pre-determined time, you get the lump sum of money you initially invested back.
There are a few terms you'll want to understand when discussing bonds with your financial advisor. Your bond will mature on the day you get the principal-that lump sum you invested-paid back to you. You'll also want to know what the coupon rate-the interest rate you will be paid-on the principal is. This will help you figure out what your bond will yield.
Types of Bonds
Sound simple? It is, except there are many types of bonds, all of which are tied to different industries. If you buy a municipal bond, you are lending to a city or agency of a branch of local government. If you buy a corporate bond, you are lending to a corporation. You can buy US Treasury Bonds, thereby investing in the United States Treasury. Other government agency bonds are backed by different agencies of the US government, such as by mortgages or student loans. Different bonds are held for different lengths of times and yield different percentages.
Some bonds, such as zero coupon bonds, mature in a unique way that shifts their core value as they mature. Zero coupon bonds are bought at a discount and then mature to a predetermined price, so you earn not interest, but the difference between the initial buying price and the end sale price.
Most investment portfolios contain at least some bonds. Bonds are considered a safe, conservative investment vehicle.
 | A mutual fund's prospectus describes the fund's objectives and the securities it invests in. The name of the mutual fund can be revealing, but you should check out the objectives and strategy to find out its goals. |
 | Understanding the basics behind investing in bonds will help you decide whether this type of investment is right for you. Bonds are investment securities that represent debt obligations between the bonds' issuers, who are the borrowers, and investors like you, who are the lenders. In other words, bonds are essentially the IOUs of the corporate and government financial worlds. |
 | Bond investment is an essential part of building a well-balanced portfolio. However, don't just blindly invest in bonds; determine your investment strategy before you begin building your portfolio. |
 | If you're new to the world of investments, you may be surprised by the many types of bonds available. Bonds are essentially loans. However, not all bonds are alike. You will want to understand the following bonds before you invest. |
When an investor, financial institution, mutual fund or foreign Government wants to protect itself from inflation, it may enter into one or more of several financial vehicles designed to protect their financial interests from inflation. |
