Greetings and welcome back to this edition of The Winning Investor’s Quick and Dirty Tips for Making Money in Any Market.  I'm your host Andrew Horowitz.

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What’s a Safe Way to Invest?

We've spent the last few episodes talking about how to hedge your portfolio, but this time, we're going to discuss a safe addition to your portfolio that is often a welcome component of any winning portfolio. Believe it or not, what we are going to discuss here is safer than investing in stocks, so be sure to pay close attention!

When most people think about investments, they are talking about stocks and bonds--the classic, simple pillars of any balanced portfolio. Usually, investors have a balance of stocks and bonds, and the percentage of each can increase or decrease over their life or depending on how volatile the outlook for the stock market is for the future.

What are Bonds?

Bonds provide safety from the stock market and economic storms--they are an attractive complement to a long-term investment strategy that provides security, very low risk, and peace of mind.

Let's start by defining some of the basic terms used when it comes to investing in bonds.

The best way to think of a bond is to think of an IOU (I owe you).  By purchasing a bond, you are giving money to someone who promises to pay you back later with interest.  Those who invest in bonds do so to profit from the interest payments, which are often paid on a stable, predictable schedule, whether it be monthly, quarterly, or twice per year, or once per year depending on the type of bond.

Common Terms Associated with Bonds

When you listen to people talk about bonds you may hear a number of financial terms. I’ll define a few of them for you so you can better understand the discussion.

• Issuer: The organization who issues the bond is called the "Issuer" which might be a company, city or state government, or even the Federal Government. 
• Principle: Principle refers to the amount of money that the bond is written, which is how much you pay for the bond.  This might be $500, $1,000, $5,000, $10,000 or more.
• Coupon: The coupon refers to the amount of interest that is due and the date of payment for that interest. The interest rate might be 1%, 2%, 5%, but it’s usually not greater than 7% to 10% in most cases.
• Credit rating: Credit rating refers to the stability of the bond and the ability of the issuer to pay back the bond.  That gives an idea of the risk of holding the bond.  Treasury Bonds are the safest bonds, which are rated "triple A."  Corporate or municipal bonds have ratings that might be "double A".  Bonds that are rated higher have less risk of defaulting or not being able to be paid back to you, the investor.  These higher-rated bonds will often have lower interest rates because they are safer. That means….  Corporate bonds or junk bonds with low credit ratings might offer a higher interest to attract investors, but be careful--if the company goes bankrupt, or otherwise cannot pay back their debt and bond obligations, you might lose part or all of your investment with them.
• Yield: Yield refers to the interest rate of the bond.  For example, a bond that you purchase for $1,000 which pays you $80 per year in interest is said to have an 8% yield.
• Par: If you ever hear the word "par" in the context of a discussion on bonds, it doesn't refer to golf!  It refers to the "face value" of the bond.  For example, a $1,000 bond that is priced at $1,000 is said to be at "par."  If you can buy a $1,000 bond for $950, then this bond would be at "discount."  Yes, there is a such thing as discount bonds and even bonds that cost more than par, which are said to be at a premium.