Why You Should Love Bonds

Stocks & Bonds

Why You Should Love Bonds

Think bonds are stodgy? Think again. Bonds are an integral part of your long-term path to wealth, so read and profit.

Perhaps you own a bond fund through your 401(k), or you keep a stack of old bond certificates your grandmother once gave you at the back of a closet. But how much have you ever really thought about bonds?

In truth, bonds are an indispensable part of your long-term path to wealth and security. Treasury bonds, which are issued by the Federal government, have returned an annualized 5.5% over the long run, while bonds issued by corporations have returned an average of 5.9% per year. And in scary times, such as the present, bonds usually don't lose nearly as much as stocks. Sometimes, their prices even rise.

Unlike stocks, which represent a slice of ownership in a company, bonds are IOUs. Their issuers promise to repay investors in full by a certain date and pay a fixed amount of interest along the way. Although bonds are usually issued in some nice round amount--$1,000 is common-they often trade at a discount or premium to that amount between the time of issuance and the maturity date.

Take our seven-question quiz on the basics of bonds to see how well you understand them and to learn more about how to use them. Once you're done, see where the opportunities lie today (see Opportunity Rocks in Bonds).