Bonds are securities representing the debt of the issuing corporation. You're buying an IOU for which the issuer must pay the bondholder a specified rate of interest for a specific period of time and then repay the face value upon maturity. You choose the duration of bond and also credit quality. Intermediate-term bonds maturing in five to seven years will hold onto the value of what you have. They serve as protection for your portfolio against drops in the stock market.
Municipal bonds are tax-exempt.
That's a very big deal if you're in a 28 percent or higher individual tax bracket. But, on the other hand The downside is that bonds, once a bastion of dependability, have in recent years been ravaged by unpredictable interest rate jumps and plummets. Whenever interest rates go up, the value of existing bonds goes down. Also, corporations and municipalities often will call in their older, high-interest bonds so they can finance at lower rates. Goodbye, high return.