Bonds are back. They helped fund America’s efforts in World War II and they’re making a big-time comeback 60 years later. Essentially loans to the feds, treasury bonds are backed by the ‘full faith and credit’ of the federal government and considered some of the safest investments in the world. Municipal bonds, loans to a state, city or county agency, are issued for public works that have an impact on all of us – building of schools, hospitals and roads.
There’s also corporate bonds, which yield the most profit but are also the riskiest. Investment guru Joe Terranova says the benefit of purchasing corporate bonds is the yield, but if you enter into a challenging business cycle like the current downturn, corporate bonds stand to lose value if the particular corporation loses business.
Municipal bonds are less risky as they are backed by the municipality and also go to fund something tangible, like a new highway or some other part of the infrastructure. Also, interest paid by the issuer to municipal bond holders is often exempt from federal taxes, as well as state and local taxes depending on where the issuer is located. The disadvantage, of course, is that the yields tend to be historically less than corporate bonds. And, if the municipality has a declining credit rating, which can occur in a budget deficit, the value of the bond will decrease.
Only buy triple-A rated bonds, Terranova advises. In this environment, you don’t need to be taking risks with the quality of the debt you buy. Bonds are rated by three agencies: Fitch, Moody’s and Standard & Poor’s. You can find the rating of a particular bond either through your broker or fund, or through the web sites of the ratings agencies, listed at left.