A fixed-income primer
Here is a quick overview of bond types, concepts and terminology.
Bonds are securities representing a debt. When you buy a bond you are essentially loaning money in exchange for interest payments. Unlike stocks, bonds have a maturity date, when the loan will be paid off.
Treasury securities are issued by the U.S. government and include bonds (long-term), notes (intermediate-term) and bills (up to one year).
Municipal bonds are described in the article to the right.
Corporate bonds are issued by private companies.
Zero-coupon bonds do not pay interest. Rather, they are sold at a discount and redeemed at full value.
Convertible bonds are hybrids in that they may under certain conditions be converted into stock.
Some bonds have a variable interest rate tied to an inflation index, which protects you from being left behind when rates rise. In exchange for this protection they will pay a lower interest rate than a comparable bond without this feature.
A bond is callable if the issuer has the right to redeem it prematurely. The issuer will often do so if interest rates have dropped and it can refinance at a lower rate.
CDs are usually issued by banks and are FDIC-insured
You can purchase individual bonds either directly from the issuer or on the secondary market. But this carries certain risks (see the accompanying article to the right). Some of these, such as liquidity or event risks can be mitigated by investing in bond funds or ETFs.
