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One of the questions that many people have when it comes to look at how much return they are getting on their bonds has to do with the way the information is presented on the Savings Bond Wizard offered by the Treasury Department. One point of confusion has to do with the way I-bonds are presented, especially with regard to the term “yield.”

When the Wizard uses the term “yield”, it is referring to the average rate of return up to the present point. It is not actually referring to the current yield on an I-bond. It means the average rate of return up to the current point, over the life of the bond. When you see the “rate”, though, it means the current six-month period rate. I-bonds have two different rates, with a fixed rate for the life of a bond, and the inflation rate, which is adjusted in May and again in November of each year. So, if the current rate is higher than the yield, it is an indication that the rate is up in comparison to the average yield you have had over the life of your I-bond.

An I-bond is just one of the Treasury bonds available for investing. These are loans you make to the government, and the government pays you interest. I-bonds are protected from inflation. You can purchase them through Treasury Direct. It you use an electronic account, you only need a minimum of $25 to get started. Bonds offer relatively low returns, but they aren’t too bad. The current rate on I-bonds is 3.36% through the end of April — not too shabby for such an investment.  Better than a high yield savings account.

Bonds can make a good addition to an investment portfolio in need of a little shoring up for safety, but it is important to realize that you will get slow growth on bonds, and that if you want higher returns, you will need to balance things with other types of investments.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.

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One of the more heated debates that goes on in the world of income investing is whether stocks should be favored, or whether bonds should be the investment of choice. As always, what you do depends on your personal situation, and what you are comfortable with. A financial professional can also help you chart your course. But it does help to take a look at some of the basics of bonds and stocks when trying to make your decision.

Bonds

Bonds are considered safer than stocks. They are normally fairly reliable, especially U.S. government bonds. Even some corporate and municipal bonds are reasonably reliable (while offering higher returns than Treasuries). Unfortunately, bond returns are relatively low, to go along with this lower risk. In many cases, your income from bonds is eroded by inflation. On top of that, right now bond interest is taxed at your income rate — which means that between taxes and inflation your income could be very low indeed. Investing in TIPS can actually help you combat the effects of inflation, though.

Stocks

The Motley Fool points out that over time, stocks outperform bonds in most cases:

Over long periods, stocks have outperformed bonds. Period. They have done so more than 95% of the time in the 20-year periods between 1871 and 2006.

Another valid point is the fact that there are dividend-paying stocks that provide even more income on top of returns from stock increases. Dividends are also taxed at a lower rate, capping out at 15%. (Buy and hold investors can also enjoy the the tax efficiency of long term capital gains.) And if you use DRIPs, you can reinvest your dividends free of charge — it’s like using free money to buy more shares. You can adjust this down the road as you need the income.

In the end, some diversity in your holdings is a good thing. But don’t be so concerned about the stock market that you overweight your investment portfolio with bonds and neglect the advantages that can come your way through stocks.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.

Right now, there is a bit of jitters with regard to corporate bonds. The specter of recent bankruptcies makes potential bond holders nervous that they won’t receive their money back. However, for those who are willing to take a chance, it might be time to get back into corporate bonds. Here is what Jeff Rose, CFP, says about corporate bonds at Good Financial Cents:

Perhaps most importantly, Corporate Bond valuations still look attractive and  the investment thesis of investors being paid to wait is still very much valid. At a 2.5% yield advantage to Treasuries, investment corporate bond yield  spreads are still 1.0% above the historical average. The 2.5% yield advantage is more impressive considering a 10-year Treasury yield under 4%. The  yield advantage creates a high hurdle for government bonds to outperform

If you really have the stomach for it, Rose offers this information on high yield corporate bonds:

In the high yield market, the current yield spread of 9.1% remains well above the 5.5% average. Defaults continue to rise in the high yield market, with Moody’s forecasting defaults to peak at 12% in the fourth quarter, while  S&P has forecast a peak default rate of 14% for the first quarter of 2010. While alarming on the surface, the estimates have come down over the past  couple of months, and investors are looking past the peak toward a decline  in default rates in 2010.

Clearly, there is some hope there to make a little bit better yield with corporate bonds by adding them to your portfolio. You can even look into emerging market bonds if you want a little international diversity in your bond portfolio. However, it is important to realize that you take on additional risks. These bonds have higher default rates, and you run the risk of losing your principal.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.