Beware of Bonds By Terry Savage

Bonds are just as risky as stocks. That's a simple fact not recognized by many investors, who still view bonds in their historic sense of being a more secure investment because they have a priority call against a company's assets in case of a bankruptcy. That's true -- in the long run.

But in the short-run bond prices can be just as volatile as stock prices -- costing you money if you must sell at the wrong time, or if you hold them and are stuck with below-market yields.

Here's a simple rule that applies to all bonds: When interest rates rise, bond prices fall.

That's just the way bonds work. If you own a low-yielding bond when interest rates go up, then market participants will offer you less than the full face value of your bond if you want to sell. The amount of this price discount depends on the "maturity" of the bond -- the length of time before the issuer promises to repay your $1,000 face value.

The longer the maturity, the greater the price decline when rates change. Short-term bonds, with maturities of three years or less, will be far less impacted by rising rates than bonds with longer maturities.

Here are some more things you should know about bonds:
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