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When it comes to investing, bonds can be a smart addition to your portfolio in conjunction with more aggressive stocks. Here's a breakdown of three major types of bonds available:

US government bonds: These bonds are considered the safest bonds because the government promises to pay you your interest and to repay the loan. Because there's virtually no risk with these bonds, they don’t pay you very much interest.

Corporate bonds: These are bonds issued by companies that need/want to borrow your money so they can use it to expand their business. There's no guarantee that you'll get your money back, but if you buy a bond of a large and more established company, the odds are better than if you buy a bond from a small, struggling company (bonds from these companies are called “junk bonds” or “high-yield” bonds).

Municipal bonds: These are bonds issued by cities from across the country to build roads, bridges, hospitals, low-income housing, etc. If you're in a high tax bracket, you might benefit from municipal bonds because they're free from federal income tax, and if you buy bonds in the state you live in, they're also free from state income tax.

Nestpert Robert Pagliarini, financial advisor and author of The Six Day Financial Makeover

-- The Nest Editors

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