money guidance and how to get rich_118

_{Bonds are essentially long-term loans. If a company issues bonds, it's}

_{borrowing cash and promising to pay it back at a certain rate of interest.}

_{Bonds sold by the U.S. government's Treasury Department are called}

_{"Treasuries." State and local governments issue "municipal bonds,"}

_{while businesses issue "corporate bonds" (sometimes called corporate}

_{"paper"). Companies that may be perceived as low quality are forced}

_{to offer high-interest-rate "junk" bonds to attract buyers. There's a}

_{higher risk that someday they won't have the cash to cover interest}

_{payments and the bonds could default.}

_{Bond investors receive regular interest payments from the issuer at}

_{what is called the "coupon rate." For example, a $1,000 bond with a}

_{coupon rate of 10% generates payments of $100 per year. When the}

_{bond matures — after perhaps 5, 10, or 30 years — investors get back}

_{their initial loan, called "par value." Most corporate bonds have a}

_{par value of $1,000, while government bonds can run much higher.}

_{Sometimes a company will "call" its bond, paying back the principal}

_{To calculate a bond's yield, divide the amount of interest it will pay}

_{over the course of a year by its current price. If a $1,000 bond pays}

_{$75 a year in interest, its current yield is $75 divided by $1,000, or}

_7.5%.

_{Once issued, bonds can be traded among investors, with their prices}

_{rising and falling in reaction to changing interest rates. For example,}

_{when rates fall, people bid up bond prices. If banks are offering 6%,}

_{an 8% bond starts looking good.}

_{In the long run, stocks have outperformed bonds handily. According}

_{you read that right — 195 years), the stock market offered an average}

_{nominal annual return of 8.4% per year, compared to 4.8% for}

_{long-term government bonds.}

_{Stocks outperform bonds even when you eliminate the 19th century}

_{data. According to Ibbotson & Associates, from 1926 to 1996 (notice}

_{that includes the Great Depression years), U.S. Treasury bills returned}

_{an average of 3.7% per year, compared with 5.6% for long-term corporate}

_{bonds, 10.7% for large-company stocks, and 12.6% for smallcompany}

_{stocks. If you had invested $5,000 in T-bills 50 years ago, it}

_{would now be worth $30,754. Growing at 10.7% in stocks, it would}

_{be worth $806,030.}

_{For long-term investors, stocks offer the best potential for growth. Still,}

_{it's smart to understand how bonds work before you dismiss them.}