Bond. Issued to raise money, a bond represents a debt owed to the investor by a corporation, municipality, state, or the federal government. Bonds pay a specified rate of interest for a specified period of time, then pay back the entire debt. Bonds are rated by quality--the integrity or degree of solvency of the group issuing the bond--with socalled “junk bonds’’ usually being the lowest quality.
Certificate of deposit (CD). Like a bond, a CD represents a debt issued by a bank or savings and loan institution, paying interest at a stated rate for a specified time period. The federal government usually insures each CD for up to $100,000.
Mutual fund. A mutual fund is actually an investment company that is open to the public. It invests its shareholders’ money in a diversified group of investments according to established objectives. More than 3,000 funds exist to meet any investor’s needs. Mutual funds provide diversification and professional management to small or large investors at a reasonable cost and are regulated by the Securities and Exchange Commission.
Money-market fund. A type of mutual fund, a money-market fund is a portfolio of liquid short-term instruments like treasury bills, certificates of deposit, and bank debt, in which shares or interest may be purchased. The investments are professionally managed and, although not insured, are considered “safe’’ and are widely used. Money-market funds typically pay higher interest than bank accounts, and assets can be withdrawn immediately.
Stock. Stocks represent the capital or funds that a corporation raises through the sale of shares entitling the holder to declared dividends and to other rights of ownership.
Treasury bill, note, or bond. These investments represent the debt of the U.S. Treasury. Each earns interest, which is paid out periodically. Investors generally hold them to maturity, at which point the principal is returned. (Bills typically mature in one year, notes from two to 10 years, and bonds anywhere from seven to 40 years, depending on the type.) Treasury bills, notes, and bonds are backed by the full faith and credit of the government. --L.A.
A version of this article appeared in the June 01, 1990 edition of Teacher as Financially Speaking