Chapter 12. Bond Funds: When Boring Is Best

In This Chapter

  • Defining bonds

  • Knowing when and why to invest in bond funds

  • Understanding how bond funds differ from one another

  • Selecting short-, intermediate-, and long-term bond funds

  • Considering CDs, GICs, and other alternatives to bond funds

Many investors, both novice and expert, think that the b in bonds is for boring. And they're partly correct. No one gets excited by bonds — unless she's an investment banker, money manager, or broker who deals in bonds and makes big bucks because of them.

But take the time in this chapter to get the whole scoop on bonds. They may seem boring, but they generally offer higher yields than bank and money market accounts with less volatility than stocks.

Understanding Bonds

So what the heck is a bond? Let me try to explain with an analogy. If a money market fund is like a savings account, then a bond is similar to a certificate of deposit (CD). With a five-year CD, for example, a bank agrees to pay you a predetermined annual rate of interest — say, 4.5 percent. If all goes according to plan, at the end of five years of earning the 4.5 percent interest, you get back the principal that you originally invested.

Bonds work about the same way, only instead of banks issuing them, corporations or governments issue them. For example, you can purchase a bond, scheduled to mature five years from now, from a company such as Walmart. A Walmart five-year bond may pay you, say, 6 percent. As long as Walmart doesn't have a ...

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