Bonds

What they are:

A bond is an “IOU,” certifying that you loaned money to a government or corporation and outlining the terms of repayment.

 How they work

Buyer may obtain bond at a discount. The bond has a fixed interest rate for a fixed period of time (determining how much time you can go without the money is important). When the time is up, the bond is said to have “matured” and the buyer may redeem the bond for the full face value.

 Types

 Corporate

Sold by private companies to accumulate money. If company goes bankrupt, bondholders have first claim to the assets, before stockholders.

 Municipal

Supplied by any non-federal government. Interest paid comes from taxes or from revenues from special projects. Furthermore, earned interest is exempt from federal income tax.

 Federal government

Considered the safest investment you can make. Even if U.S. government goes bankrupt, it is duty-bound to repay bonds.

There are ETF’s for these bonds. As always I advocate doing research, look for the cost of holding these bonds and when you are able to redeem them. It’s all about details.

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