Bond Investing: Is It A Safer Place For Your Money?

Bond investing is one way for investors to receive a regular fixed income, and it is a particularly popular form of investment during shaky times in the stock market. That is because bonds typically offer less volatility than stocks, although that is not to say that the bond market does not have unique risks of its own. Almost a trillion dollars exchanges hands daily on the United States bond market.

A bond is basically a loan from you to a government or company. That government or company uses the bond as a way to borrow money in return for paying it back with a certain amount of interest over a certain amount of time. That period of time can range from months to decades. Has a relative ever given you a savings bond? That is one form of bond. In that case, the federal government is the borrower.

Federal bonds are some of the safest investments available. Because of this, the interest rate is lower compared to most other bonds. However, the risk of the federal government not paying you back is miniscule compared to just about any other potential borrower.

Municipal bonds are offered by local governments such as cities, counties, or states, these local governments sometimes feel the need to take on bond debt in order to finance special projects that they otherwise would be unable to afford at the time. As a bonus, municipal bond holders often are exempt from paying taxes on the interest income they receive.

Corporate bonds are offered by many of the same companies that are listed on stock markets. Since stock offerings are a one-time way for companies to raise funds, companies use corporate bonds in much the same way that governments use bonds—for the funding of something special that wouldn't be affordable at the time without outside help from people involved in bond investing.

It is important for bond investors to be aware of the risks and rewards of bonds. Not all borrowers are equal. Standard & Poor's and Moody's are the two major services out there to help you evaluate the creditworthiness of potential borrowers. The safest investments are with borrowers rated with an A or with multiple A's. Those with low grades, often called junk bonds, run a much higher risk of defaulting on their loans. However, people have been known to get rich from investing in junk bonds—just make sure any money you invest in that area is money you could afford to lose.

Some bonds give the borrower the option to pay their loans back early, saving them from paying you the interest you would have continued to receive for the expected life of the bond. You may wish to avoid these bonds that have a "call option," so you don't have to worry about your interest income ending prematurely.

As is the case with any investment, it is important for investors to carefully assess their current investment situations and goals for the future. If you are looking for an investment that offers regular interest income, are looking to hedge against downturns in other markets, or you simply want to keep your portfolio diverse, bond investing may be the right fit for you.