Booyah Breakdown: Bond With Bonds

The interest you get on that bond is sometimes called your coupon payment. Years ago, bonds used to come with attached coupons that investors had to clip so they could redeem their interest payments. These days, it's all done electronically -- but old habits die hard so that interest payment is still called the "coupon."

So a bond with an "8% coupon" pays 8% interest based on the face value of the bond, in two semiannual installments. Assuming a face value of $5,000, like in our example above, that's two $200 interest payments a year.

Bond, James Bond

Many folks presume that because bonds have maturity dates, they're pretty much guaranteed investments. And that's true in most instances, so it's no surprise that older investors who need secured money for retirement will invest in bonds. The same goes for the guy whose kid will be in college in five years or has a child getting married in the near future. When you know you need the money soon, you sometimes don't want to risk it in the equities market.

But as much as bonds are supposed to be the stable, low-risk portion of your investment portfolio, the world of bond investing is still rife with pitfalls.

That's because bonds have credit risk. If the U.S. government issues you a bond -- a Treasury bond -- then you can rest assured you're going to get your money back. But if you decide to buy a bond from a risky company, such as GM (GM) or Ford (F) these days, because it's offering a really high interest payment, you run the risk that the company is not going to have the money to give back to you when your bond matures.