Every person want to increase his/her investments while

removing or say minimizing our risk. With these two goals

at odds with each other, the course of action which is right

for you will depend on your risk tolerance and investment

Corporate bonds (also called corporates) are debt obligations, or IOUs, issued by private and public corporations. They are typically

issued in multiples of $1,000 and/or $5,000. Companies use the funds they raise from selling bonds for a variety of purposes, frombuilding facilities to purchasing equipment to expanding the business.

When you buy a bond, you are lending money to the corporation that issued it. The corporation promises to return your money, or principal, on a specified maturity date. Until that time, it also pays you a stated rate of interest, usually semiannually. The interest payments you receive from corporate bonds are taxable. Unlike stocks, bonds do not give you an ownership interest in the issuing corporation.

Investors buy corporates for a variety of reasons:

Attractive yields Corporates usually offer higher yields than comparable-maturity government bonds or CDs. This high-yield potential is generally accompanied by higher risks.

Dependable income People who want steady income from their investments, while preserving their principal, include corporates in their portfolios.

Safety Corporate bonds are evaluated and assigned a rating based on credit history and ability to repay obligations. The higher the rating, the safer the investment.

Diversity Corporate bonds provide the opportunity to choose from a variety of sectors, structures and credit-quality characteristics to meet your investment objectives.

Marketability If you must sell a bond before maturity, in most instances you can do so easily and quickly because of the size and liquidity of the market. (

The corporate bond market is large and liquid, with daily trading volume estimated at $23 billion. Issuance for 2002 was an estimated $594* billion. The total market value of outstanding corporate bonds in the United States at the end of 2002 was approximately $4.1 trillion.**

Most corporate bonds trade in the over-the-counter (OTC) market. This market does not exist in a central location. It is made up of bond dealers and brokers from around the country who trade debt securities over the phone or electronically. Market participants are increasingly utilizing electronic transaction systems to assist in the trade execution process. Some bonds trade in the centralized environments of the New York Stock Exchange (NYSE) and American Stock Exchange (AMEX), but the bond trading volume on the exchanges is small. The OTC market is much larger than the exchange markets, and the vast majority of bond transactions, even those involving exchange-listed issues, take place in this market.

Investors in corporate bonds include large financial institutions, such as pension funds, endowments, mutual funds, insurance companies and banks. Individuals, from the very wealthy to people of modest means, also invest in corporates because of the many attractions these securities offer.

Credit ratings

A bond issuer's ability to pay its debts-that is, make all interest and principal payments in full and on schedule-is a critical concern for investors. Most corporate bonds are evaluated for credit quality by Standard & Poor's, Moody's Investors Service and Fitch Ratings. (See their rating systems in the chart on page 14.) Checking a bond's rating before buying is not only smart but also simple: Just ask your Financial Consultant.

Bonds rated BBB or higher by Standard & Poor's and Fitch Ratings, and Baa or higher by Moody's, are widely considered "investment grade." This means the quality of the securities is high enough for a prudent investor to purchase them.

One of the most difficult risks for investors to understand is that posed by "call" and refunding provisions. If the bond's indenture (the legal document that spells out its terms and conditions) contains a "call" provision, the issuer retains the right to retire (that is, redeem) the debt, fully or partially, before the scheduled maturity date. For the issuer, the chief benefit of such a feature is that it permits the issuer to replace outstanding debt with a lower-interest-cost new issue.

A call

A call feature creates uncertainty as to whether the bond will remain outstanding until its maturity date. Investors risk losing a bond paying a higher rate of interest when rates have declined and issuers decide to call in their bonds. When a bond is called, the investor must usually reinvest in securities with lower yields. Calls also tend to limit the appreciation in a bond's price that could be expected when interest rates start to slip.

Because a call feature puts the investor at a disadvantage, callable bonds carry higher yields than noncallable bonds, but higher yield alone is often not enough to induce investors to buy them. As further inducement, the issuer often sets the call price (the price investors must be paid if their bonds are called) higher than the principal (face) value of the issue. The difference between the call price and principal is the call premium.

Generally, bondholders do have some protection against calls. An example would be a bond that has a 15-year final maturity, noncall two years. This means the investor is protected from a call for two years, after which time the issuer has the right to call the bonds.

Sinking-fund provisions

A sinking fund is money taken from a corporation's earnings that is used to redeem bonds periodically, before maturity, as specified in the indenture. If a bond issue has a sinking-fund provision, a certain portion of the issue must be retired each year. The bonds retired are usually selected by lottery.

One investor benefit of a sinking fund is that it lowers the risk of default by reducing the amount of the corporation's outstanding debt over time. Another is that the fund provides price support to the issue, particularly in a period of rising interest rates. However, the disadvantage-which usually weighs more heavily on investors' minds, especially in a falling-rate environment-is that bondholders may receive a sinking-fund call at a price (often par) that may be lower than the current market price of the bonds.

Other types of redemptions

Bond investors should be aware of the possibility of certain other kinds of calls. Some bonds, especially utility securities, may be called under what are known as Maintenance and Replacement fund provisions (which relate to upgrading plant and equipment). Others may be called under Release and Substitution clauses (which are designed to maintain the integrity of assets pledged as collateral for some bonds) and Eminent Domain clauses (which have to do with paying off bonds when a governmental body confiscates or otherwise takes assets of the issuer). Ask about these and any other special redemption provisions that may apply to bonds you are considering.

You can avoid the complications and uncertainties of calls altogether by buying only noncallable bonds without sinking-fund provisions. If you do buy a callable bond and it is called, be aware that its actual yield will be different than the yield to maturity you were quoted. So ask your Financial Consultant to tell you what the yield to call is as well.

Puts

Just as some issuers have the right to call your bond prior to maturity, there is a type of bond-known as a put bond-that is redeemable at your option prior to maturity. At specified intervals, you may "put" the bond back to the issuer for full face value plus accrued interest. In exchange for this privilege, you will have to accept a somewhat lower yield than a comparable bond without a put feature would pay.

Yield is a critical concept in bond investing, because it is the tool you use to measure the return of one bond against another. It enables you to make informed decisions about which bond to buy.

In essence, yield is the rate of return on your bond investment. However, it is not fixed, like a bond's stated interest rate. It changes to reflect the price movements in a bond caused by fluctuating interest rates.

Here is an example of how yield works: You buy a bond, hold it for a year while interest rates are rising and then sell it. You receive a lower price for the bond than you paid for it because, as indicated above under "Understanding Interest-Rate Risk," no one would otherwise accept your bond's now lower-than-market interest rate. Although the buyer will receive the same dollar amount of interest you did and will have the same amount of principal returned at maturity, the buyer's yield, or rate of return, will be higher than yours was-because the buyer paid less for the bond.

There are numerous ways of measuring yield, but two-current yield and yield to maturity-are of greatest importance to most investors.

Current yield

The current yield is the annual return on the dollar amount paid for a bond, regardless of its maturity. If you buy a bond at par, the current yield equals its stated interest rate. Thus, the current yield on a par-value bond paying 6% is 6%.

However, if the market price of the bond is more or less than par, the current yield will be different. For example, if you buy a $1,000 bond with a 6% stated interest rate after prevailing interest rates have risen above that level, you would pay less than par. Assume your price is $900.

Yield to maturity

A more meaningful figure is the yield to maturity, because it tells you the total return you will receive if you hold a bond until maturity. It also enables you to compare bonds with different maturities and coupons. Yield to maturity includes all your interest plus any capital gain you will realize (if you purchase the bond below par) or minus any capital loss you will suffer .

Ask your Financial Consultant to provide you with the precise yield to maturity of any bond you are considering. Don't buy on the basis of the current yield alone, because it may not represent the bond's real value to you.

Yield to call

The yield to call tells you the total return you will receive if you were to buy and hold the security until the call date. As an investor, you should be aware that this yield is valid only if the bond is called prior to maturity. The calculation of yield to call is based on the coupon rate, the length of time to the call date, and the market price of the bond.

Corporate bond interest is usually paid semiannually. Zero-coupon bonds pay no periodic interest.

Forms of issuance

Corporate bonds are issued in several forms:

• Registered bonds Some corporate bonds are issued as certificates, with the owner's name printed on them. There are no coupons attached for the owner to submit for payment of interest. The issuer's agent or trustee sends the interest to the bondholder at the proper intervals and forwards the principal at maturity.
• Bearer bonds These are bonds that have no name printed on them and do have coupons attached. Anonymous and highly negotiable, bearer bonds are virtually equivalent to cash. The Tax Reform Act of 1982 ended the issuance of such bonds, but many remain in circulation.
• Book-entry bonds These are bonds without certificates. Just as registered bonds have largely supplanted bearer bonds, book entry is replacing certificates as the prevailing form of issuance. With book-entry securities, a bond issue has only one master, or global, certificate, which is kept at a securities depository. The ownership of book-entry bonds is recorded in the investor's brokerage account. All interest and principal payments are forwarded to the brokerage account.

Minimum investment

For OTC bonds, the minimum investment is usually $5,000. Listed bonds are issued and sold in $1,000 denominations.

Payment terms

When you buy a corporate bond (or other security), you must make sure that payment arrives at the broker's office within three business days. Some brokers require that you have your payment on deposit before they will execute your purchase. If you sell a bond, you will receive the broker's payment in approximately three business days.

Sources of information

If you are interested in a new or proposed bond offering, ask your broker for a prospectus, the official offering statement the issuer must file with the Securities and Exchange Commission. Detailed information on new bond issues is provided as well by two of the rating agencies in their weekly publications-Moody's Credit Perspectives and Standard & Poor's Credit Week. These two companies also publish information on existing bond issues. Check the Mergent Bond Record and Moody's Manuals, or Standard & Poor's Bond Guide and Standard & Poor's Corporation Records. Most brokerage offices have these publications, as do many libraries.

Marketability

How quickly and easily a particular bond can be bought or sold determines its marketability. To the extent the term "marketability" is used interchangeably with "liquidity," it also implies that the price of the security will not change much under normal market conditions. In general, for a bond to enjoy high marketability, there must be a large trading volume and a large number of dealers in the security.

Costs

Brokers often sell bonds from their firms' inventory, in which case investors do not pay an outright commission. Rather, they pay a markup that is built into the price quoted for the bond. If a broker has to go out into the market to find a particular bond for a customer, a commission may be charged. Each brokerage firm establishes its own markups and commissions, which may vary depending on the size of the transaction and the type of bond you are purchasing.