Consider these key factors before you go bond-fund shopping.
Note: This article is part of Morningstar's December 2014 Guide to Better Investment Picking special report. An earlier version of this article appeared Nov. 14, 2011.
What Is a Bond?
When you buy a stock, you become part owner of the company. When you buy a bond, you are making a loan; you are simply lending money to a company (corporate bonds) or to a government (for U.S. investors, this is most commonly the U.S. government). Because U.S. government bonds (also known as Treasuries) are issued and guaranteed by Uncle Sam, they typically offer a modest return with low risk. Corporate bonds are issued by companies and carry a higher degree of risk (should the company default) as well as return.