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Investing 101: What are bonds?

Buying government or corporate debt is one option for investing your money

February 6, 2013
The Intelligencer / Wheeling News-Register

Unlike stocks, which give their owners a share of the company that issues them, bonds are debts owed by the issuer to the bondholder.

When you buy a bond, you are entitled to be repaid but only after the date on which the bond matures. Prior to that date, you receive fixed interest that may be paid monthly, annually or semiannually.

Depending on who issues them, bonds may take anywhere from 90 days to 30 years to mature. The interest rate is determined by the date of maturity as well as the credit rating of the issuer.

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Bonds may be issued by companies or governments and are used to fund building projects or to meet expenses. A few of the most common bonds are municipal bonds, U.S. treasury bonds and U.S . savings bonds.

U.S. Bonds

Unlike municipal bonds, which are issued by local governments, U.S. treasury bonds and U.S. savings bonds are issued by the treasury department.

The main difference between the two is that while treasury bonds can be traded, savings bonds cannot. There is also a limit to how many savings bonds one individual can purchase.

Junk Bonds

Unlike investment-grade bonds, which are generally considered to be low risk, junk bonds are not usually safe investments.

This is because they're issued by companies that have poor credit ratings. These companies want to raise capital without having to pay a high interest rate, and issuing junk bonds solves that problem.

As with any type of investment, you should do your homework before buying bonds. While bonds can be a good long-term investment, those who want the potential for greater returns should consider buying stocks instead.

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