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Bond Basics

Bonds are a form of investment and for many offer one of the safest options for long term savings. A bond operates similar to an IOU. If a state, local or even the national government needs money for a project, one way to generate the cash is by selling bonds. The holder will receive interest payments twice per year on the bonds and can cash the bond in at the maturity date. A historical example of bonds was the Second World War. The government needed money to support the war effort and sold bonds to the citizens to do so.

A bond is basically a debt in which the entity must pay back to you. There are three basic types of bond that carry varying levels of risk. Government bonds are considered the safest option due to the fact that they carry the backing of the US Government. They tend to be for longer periods of time and carry lower rates of interest due to the low risk factors. Generally government bonds take more than 10 years to mature but the safety the offer attracts many investors in volatile markets.

The next step up in terms of risk is a municipal bond or muni. Municipal bonds offer tax free interest rates for the bond holders and a fair amount of security. Municipal bonds are often conducted at the local or state level to fund projects such as schools, hospitals or other pubic services. The interest rates are slightly higher than the government bonds due to the fact that there is a bit more risk involved. For a bond holder to loose their money it would take the state or local government to go bankrupt. This can happen but fortunately doesn't all that often.

Finally there are corporate bonds. Corporations can issue stocks as well as bonds to generate income. These are the riskiest of the bond options and are characterized by shorter periods of time and higher interest rates. The bond duration for corporate bonds is usually less than 5 years but longer periods of time can be purchased. Keep in mind that corporations go under all the time so be sure the entity has a good outlook before purchasing a long term corporate bond.

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