What is a bond?
When you buy a bond, you are loaning the issuer of the bond money for a certain period of time. In return for the loan, the issuer promises to pay you fixed interest payments on a regular basis, usually semi-annually, and to return the full principal loan amount to you at the end of the time period. So a bond is essentially an "IOU" written by the issuer of the bond to you. Like stocks, bonds may also be purchased on the secondary market.

How are bonds structured?
Bonds, in the most general sense, are issued with three essential components that will define the terms of the bond.

• Maturity — indicates the life of the bond. Most bonds have maturities ranging from three months to 30 years.
• Par value — also called "face value," this is the amount the bond holder will be repaid when the bond reaches maturity. For example, if you purchase a $1,000 par value bond, you will receive $1,000 at maturity.
• Coupon rate — also called "interest rate," this is the percentage of par value you will receive as a fixed interest payment annually. For example, if you purchase a $1,000 par value bond with a 10% coupon rate, you will receive $100 in interest each year.

What kinds of bonds are available?
Bonds are issued by a variety of entities to satisfy a variety of capitalization needs.

• United States government
• United States government agencies
• State and municipal governments
• Corporations

Government bonds may offer tax advantages in some situations. Ask your Financial Consultant for more details on tax consequences for various types of bonds.

How are bonds different than stocks?
When you buy a corporate bond, you become a creditor to the corporation. Which means if the corporation files for bankruptcy protection, you have a senior claim for return of your principal over stockholders in the liquidation of assets. Principal and interest for bonds issued by government entities are backed by their taxing authority. In the case of U.S. government agency bonds, they are guaranteed by the full faith and credit of the U.S. government.

Why choose bonds?
Bonds offer a wide range of benefits that are attractive to conservative, moderate and aggressive investors alike.

• Safety/capital preservation — because a bond issuer must pay face value at maturity, you are more likely to recoup your original investment at a specific day in the future, compared to stocks, which have no maturities or guaranteed return of principal.
• Fixed return — regularly scheduled interest payments offer an element of predictability, compared to stocks, where returns are less certain.
• Current income — bonds provide regular interest payments at set times for those seeking a steady stream of cash income.
• Reduce portfolio risk — because bonds and stocks generally behave differently in various market conditions, they may help reduce the level of risk in an investment portfolio.
• Capital appreciation — like other securities, it is possible that bonds traded on the secondary market may be sold for a price higher than what was paid originally to acquire them.

What risks are bonds vulnerable to?
As with any type of investment, bonds are subject to risk. Understanding your risk tolerance will help you make choices about how these risks will affect your decision to invest in bonds.

• Credit risk — credit ratings may indicate the likelihood of an issuer to be able to make timely principal and interest payments.
• Interest rate risk — changes in interest rates may affect the market price of a bond. Generally, when interest rates go up, the market price for a bond will go down (and vice versa). Generally, bonds with lower coupon rates and/or longer maturities will have the greatest fluctuation in market price as interest rates change.
• Liquidity risk — depending on the terms of your bond and the current market conditions, your bond may be difficult to sell.
• Call risk — if your bond is written with a "call provision" the issuer may redeem the bond at an earlier date than its original maturity. This generally happens during periods of declining interest rates. Which means that if you reinvest a called bond's principal, you are likely to do so at a lower interest rate.
• Purchasing power risk — inflation over time may reduce the value of the bond's principal and interest payments.
• Reinvestment risk — as coupon payments are received, you may spend them or reinvest them at lower interest rates, thereby reducing your compounded rate of return.