Bonds and bond investing do not refer to SAVINGS BONDS, which are not really bonds at all. Bond investing refers to debt securities; and while a savings bond is guaranteed safe real bonds are not. Clear as mud? Let's simplify.

Open your mind to bond investing because bonds, as well as stocks, are the building blocks of a balanced investment portfolio. You could be invested in these securities in a mutual fund you own without being aware of it. Before I explain the basics, let's go to a source of confusion: the U.S. Treasury who issues both savings bonds and Treasury bonds. Both (like all bonds) are a form of borrowing money from the public.

Savings bonds are simply a savings vehicle, where our government pays you interest for the use of your money while guaranteeing that you will not take a loss. Treasury bonds are the real thing, long-term debt securities that mature 30 years from date of issue. Once these securities are issued (sold) to the public they trade in the open market. Although they are the safest long-term debt securities in the world, you can lose money here because the price or value of any bond fluctuates as it trades in the market day in and day out. I'll explain shortly.

Bonds are called debt securities and are sold to investors by the federal government, by municipalities and corporations who want to borrow a lot of money for 20 years or so. They pay a FIXED interest rate to whoever owns them until they mature (say in 20 or 30 years). Then the bondholder is paid back the $1000 or whatever the issuer borrowed. From the time of issue, up to the time of maturity, bonds trade in the bond market. You can sell or buy any of them in the market on any business day. Thus, if you own them, you can sell them before maturity.

THE FIXED INTEREST RATE is the reason that even an ultra safe Treasury bond fluctuates in value, because interest rates in the economy change on an ongoing basis day after day. Let's say that you hold a bond with a 5% coupon rate that pays you $50 in interest each year. If interest rates start going up, the value of your investment will fall because investors now can get a higher rate elsewhere. Would you pay $1000 to earn 5% when you could get 6% on a new issue? No, you'd buy the 5% issue only if you got a discount. The market functions to bring prices in line with reality as investors buy and sell.

Many mature folks love bond investing because these securities pay a higher fixed rate than most other investments, and they want this higher income. The problem is that some don't understand the last paragraph above. If interest rates go up, bond investing is a loser.

You should not be clueless now, but you are probably not quite ready for prime time investing in bonds on your own, either. Get started in bond investing like most people do, through mutual funds. Here professionals do the selection and portfolio management for you. In this way you own a very small part of a large bond portfolio.

If you want to learn more, there are numerous articles available on the subject of bonds and bond funds. Good Luck.