If you're going to choose a bond fund, the harsh truth is that you need to know what a bond is. When you buy a stock, you become part owner of the company. When you buy a bond, you are making a loan; you are simply lending money to the company (or, in the case of Treasury bonds, to the government). Your loan lasts a certain period of time—until the date that the bond reaches maturity. In the meantime, you can typically expect dividend payments (commonly known as coupons) as interest on the loan. Thus, the essential issues for bond investing will be the bond's maturity, how much interest it pays, and how confident you are that the business or government can actually repay the loan.
Understand Interest-Rate Risk >>