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Fixed Income Products: Bonds
 
Bonds  
Companies and governments pay for some of their expenses by borrowing money from individual investors.

Just as you may borrow money for major expenses if you don't have enough cash on hand, so may businesses and governments. Sometimes they borrow from a bank, as you needed a mortgage to buy a new home. But they can also borrow by issuing a bond that promises to pay investors a fixed percentage of interest for the use of their money.

While all bonds raise money in essentially the same way, different types of bonds have different characteristics:
   
Types of Bonds
 
   
Corporate Bonds
  These bonds are sold by publicly held companies as a way of raising money for a range of activities, from expanding operations to building new facilities. Many companies prefer borrowing to issuing additional shares of stock, which dilutes the value of the stock already in the market. The interest you earn is taxable. But corporate bonds generally pay higher interest than other types, in part because they may have a higher risk of default.
 
US Treasury Notes
  The federal government sells two-, three-, five-, and ten-year notes to raise money to finance running the government. Since the government doesn't sell stocks (because there's nothing to own), the only way it can raise money is by collecting taxes and issuing bonds. You owe federal income taxes on the interest you earn, but not state or local taxes.
 
Municipal Bonds
  Sold by state and local governments, these bonds raise money to pay for a wide array of projects and expenses, and sometimes the actual operation of the government. You owe no federal tax on municipal bonds, and generally no state
or local tax on bonds issued by the municipality where you live.

For example, if you live in New York and buy New York State bonds, you owe no tax on the interest you earn. But if you live in California and buy New York bonds, you will owe tax on your earnings to California.
   
Agency Bonds
 

These bonds are issued by various government agencies, both in Washington and around the country. Among the best known are those that provide mortgage money (especially GNMAs, widely known as Ginnie Maes). The interest is taxable, so the rates are generally slightly higher than on other government bonds.

Before exploring the various trading strategies, it is important to understand what is an option, specifically what is a call and put.

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