Bonds Glossary

Zero Coupon: Commonly called strips because the interest coupon is stripped and sold separately. What you buy is a principal portion of the bond, deeply discounted to the interest rate, which matures to face value over the life of the bond. For example, a new $10,000 7-percent, 30-year Treasury bond would sell for $1,313.67, but you would collect the $10,000 at maturity. The catch: The government taxes the interest you are supposed to get annually, even though no real money is coming in.

Municipal Bonds: These are issued by state and local governments and their agencies. They carry a lower interest rate than other bonds, about 5 percent now, but the interest they pay is tax-free. New York-issued bonds, for instance, are free of New York State and local income taxes as well as federal taxes. With the lower rate being offset by the tax-free aspect, these bonds can generate a return that's competitive with bonds having much higher, but taxable, interest rates.

Corporates: These are investment-grade bonds usually rated B or above, and are issued by companies. The lower the credit rating, the higher the rate you get.

High Yield Bonds: Commonly called junk bonds, these are issued at rates as high as 3 percent or more above other bonds, because the companies are less creditworthy and more liable to default.

Convertible bonds: These are bonds that, given certain triggers, can be converted into common stock of the company.

Mortgage-backed Securities: Issued by agencies with nicknames like Ginnie Mae, Fannie Mae and Freddie Mac, these are backed by mortgages and repay a little principal each time, along with the interest. Though the returns can be high, the danger is falling mortgage rates, which leads to homeowners refinancing their mortgages. So the bonds get paid off quickly and you have to reinvest in a lower-rate environment.