Bonds attract investors because they usually pay regular interest income and pledge to repay the amount of the bond.

Bonds are loans you make to corporations or governments. Unlike buying stocks (also called equity securities), which make you a part-owner in a company, buying bonds (or debt securities) makes you a creditor.

Bonds are called fixed-income securities because they usually pay a specified amount of interest on a regular basis. However, one of their limitations for individual investors is their cost. Few sell for less than $1,000, and it's often hard to buy just one. For some people, investing in a bond mutual fund may be an alternative, though funds do not pay a fixed rate of interest or promise return of principal.

High-quality, or investment-grade, bonds are considered conservative investments because you can be reasonably confident of getting regular interest payments plus the face, or par, value of the bond when it matures.

Treasury issues are considered as extremely safe, though their market value fluctuates in response to changes in the interest rate and could be less than par value if you sold before maturity. The timely payment of interest and repayment of principal are backed by the "full faith and credit" of the government, which has the power to tax its citizens to pay its debts.

Corporate and municipal bonds are evaluated by independent rating services — the best known are Standard & Poor's, Moody's Investors Service Inc., and Fitch — which measure the financial stability of the issuer and assign a rating — from AAA to D. Any bond rated BAA or higher by Moody's, or BBB or higher by Standard and Poor's, is considered investment quality. Usually, the higher a bond's rating, the lower the interest rate it must pay to attract buyers.

What are Junk Bonds?
Investors willing to take the risk of default to receive high yields may buy corporate or municipal bonds with low ratings — or no ratings at all. These are commonly known as junk bonds.

The cheapest way to buy US Treasurys — notes and bills — is to buy them directly from the government. You open an account and place your orders without a fee. The system simplifies the investment process by storing records of the issues you own and depositing your interest and principal electronically in your bank account. Using this system, you can also reinvest your Treasury bills for up to two years using the mail, the telephone, or online at www.treasurydirect.gov.

You can buy US Savings Bonds — up to $30,000 per person a year — from banks or through payroll deductions.

• They're inexpensive — for some bonds you can invest as little as $25 — and get a guaranteed rate of interest if you hold them until they mature, or five years.
• There's no commission, and no state or local tax on the interest. Plus, you don't owe federal taxes until you redeem the bond. You may be able to avoid taxes entirely if you use the bonds to pay for your child's education, though you'll have to check the purchase and income conditions that apply.

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