Understanding Bond Investing: It's a Matter of Balance

Courtesy of:  Phil Zaczek  

Branch Name: Morgan Stanley Chicago Madison Complex

Phone Number: 312-419-3629

Web Address: http://www.morganstanleyfa.com/philip.zaczek/

What Is a Bond?

Bonds are investment securities issued by corporations or governments to raise money for a particular purpose. Basically, bonds are the
"IOUs" of the business world. There are different types of bond
funds, each with varying levels of risk and return potential. Generally
speaking, the higher the risk, the better the return potential. For example:

Government Bond Funds invest in bonds issued by the U.S.
Treasury. Historically, they have been among the strongest types of
bond investments. However, they typically offer lower returns than other bonds.

Corporate Bond Funds invest in bonds issued by private companies. They can range from "investment grade" (safer, lower return potential) to
"below investment grade" (riskier, higher return potential).

Know the Risks

Bond funds are subject to several types of investment risk,
including:

Market
     risk -- Like stock prices, bond prices move up and down. However, such
     fluctuations tend to be less severe in the bond market.

Managing Risk

Despite these risks, investors of all ages may potentially
benefit from putting some money in bond funds. Because bond funds tend to
respond to market influences differently than stock funds, they may help
balance out the risks associated with stock investing.



In addition, lower-risk bond funds, such as government and investment-grade
corporate bond funds, may help protect some of your money from losses during
turbulent times.

Bonds are subject to interest rate risk.  When interest rates rise,
bond prices fall; generally the longer a bond’s maturity, the more sensitive it
is to this risk.  Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date.  The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market
conditions or changes in the credit quality of the issuer.  Bonds are subject to the credit risk of the issuer.  This is the risk that the issuer
might be unable to make interest and/or principal payments on a timely
basis.  Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.

Bond funds and bond holdingshave the same interest rate, inflation and credit risks that are associated with the underlying bonds owned by the funds. 
The return of principal in bond funds, and in funds with significant
bond holdings, is not guaranteed.

Morgan Stanley, its affiliates and Morgan Stanley Financial Advisors do not provide tax or legal advice. Individuals should consult their personal tax or legal advisors before making any tax or legal related decisions.

If you’d like to learn more, please contact

Phil Zaczek

phone: 312-419-3629

email: Phil.Zaczek@mssb.com

Article by McGraw Hill and
provided courtesy of Morgan Stanley Financial Advisor.

The author(s) are not
employees of Morgan Stanley Smith Barney LLC ("MSSB"). The opinions
expressed by the authors are solely their own and do not necessarily reflect
those of MSSB.  The information and data
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