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A Place for Bonds in Your Portfolio

Even with the stock market booming, bonds have an important place in a diversified portfolio.  They are popular because an investor who holds certain bonds until maturity is guaranteed to get his or her investment back.  Bonds also may be attractive to those who need a steady stream of income.  There are several types of bonds to consider with your financial adviser:

Treasury bonds — These are issued and backed by the U.S. Treasury, making them among the safest investments.  They can be purchased directly through the Federal Reserve and income from the bonds is free from state income tax.

Municipal bonds — These bonds are issued by state and local governmental units.  Generally, they are free of federal income tax and may avoid state income tax.  While the yields may be lower than what is offered on corporate bonds, the tax-free feature of municipal bonds makes them attractive, particularly to investors in high tax brackets.

Corporate bonds — Bonds issued by private corporations generally offer higher yields, but are not guaranteed.  Various rating services can help investors determine how much risk is involved with a particular bond.

Bond funds — Similar to a mutual fund for stocks, bond funds hold a variety of bonds.  Some funds will specialize in a particular type of bond (municipals, for example).  A fund’s price per share fluctuates with the market value of the bonds in the fund, so it’s possible for an investor to lose some of his or her investments in the fund.

Bonds can also be given to charity, similar to shares of appreciated stock.