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Bonds 101: a primer

By HELEN HUNTLEY, Times Staff Writer

© St. Petersburg Times
published October 27, 2002


A bond is an IOU issued by a corporation or government. When you buy one, you lend money to the issuer.

A bond has a face value, sometimes called the par value, and a stated interest, or coupon, rate. Your yield is the annual interest payment divided by the purchase price. It will vary from the coupon rate if you pay more or less than face value.

Many bonds can be redeemed early at the issuer's choosing. Find out what your yield will be if your bond is "called" before maturity. Interest payments stop when a bond is called.

A quality, or credit, rating is a rating company's assessment of the issuer's ability to repay debts. Failure to pay interest or principal on time is known as default. Watch out for unrated or "junk" bonds, and buy bonds from multiple issuers to reduce your risk.

Some bonds are secured by collateral, such as equipment or mortgages. It is possible to lose money if the issuer defaults and the collateral is worth less than investors are owed.

Interest rates and bond prices move in opposite directions, a lot like a playground teeter totter. When rates go up, bond prices go down, and vice versa. Long-term bonds are more volatile than short-term bonds. If you sell before maturity, you may get more or less than you paid.

Municipal bonds pay interest that is usually exempt from federal income taxes. Some are backed by revenues from a specific source such as water bills, while others are general obligations of the issuer. Yields are lower than they are on taxable bonds, so municipals may not be a good deal if you are in a low tax bracket.

Most bonds can be purchased only by going through a broker. U.S. Treasury securities also can be purchased directly from the government online (www.treasurydirect.gov) or by calling call toll-free 1-800-722-2678.

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