April 30, 2006

Bond 
Basics Part II

     Bonds have different "ratings" which tell you how stable they are; meaning whether you 
have cause to fear the issuer defaulting on the bond either on the principal or  or the interest. 
The highest rating is a AAA rating followed by AA, A, or BBB.  All of those are looked upon as 
"high quality." Below that are BB or B which are still considered good, and C or D level which 
are "junk" bonds. 

     Why would anyone go with anything less than a high quality bond? The answer lies in the return on the 
bond. Higher risk will give higher returns with the potential of losing it all. After doing your due diligence you 
may decide the risk is acceptable to you and go with a junk bond to try to get the best return on your investment. 

     Another factor involved in the decision to purchase (or not purchase) bonds as part of your portfolio may be 
the income tax implications that are a part of other investments. Some bonds are exempt from taxes at different 
levels. If you purchase bonds from the federal government those may be exempt from all taxation.  Municipal 
bonds are the ones that many folks invest in when they are looking for tax exempt returns. They are usually 
exempt from both federal and state tax, while enabling your local government to make improvements. (Of course, 
you are not limited to buying local municipal bonds. As with any investment vehicle you really need to do your 
research to acertain the implications of any stocks or bonds you purchase as far as tax impact.

      The comfort factor or certainty of return on high quality bonds definitely has its appeal when considered 
by those approaching retirement. Although the yields may not be as high as returns on some stocks the yield 
is something you can count on. The total return, stability and security of high quality bonds make them an 
integral part of the portfolio of someone looking for a foundation for their retirement. 

      Another type of bond will not pay you any interest while you hold it, but will gain in value as you keep it. 
These are known as "Zero Coupon Bonds" and an example would be buying a bond for $750 and five years later 
getting the face value of $1,000. The longer these are held (the length of time until maturity) the less you will 
have to pay for them. In the example already given, perhaps with a 10 year maturity date, you would only have 
to pay $400. The amount of time your money is held allows for the power of compound interest, therefore the 
inital investment is substantially less than the final face value.

       Again, there are many other types of bonds and situations surrounding them, and if you have any questions, 
feel free to drop me a line. 

That's all for this week, 

     thanks 

     Rob






RobertEBritt@yahoo.com



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copyright Robert E. Britt 2006