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WHAT'S A BOND?

Bank accounts aren't the only way your money can earn interest. Bonds are a way of loaning money to a government, government agency or corporation. Just like a loan, the organizations that issue bonds agree to pay interest as a condition for using your money. When you buy a bond, your purchase price is considered the loan's principal. The terms of the bond tell you when you'll get your money back, which is known as the bond's maturity date, and how much interest you'll receive, which is known as the coupon rate.

Let's say you buy a $1,000 bond whose terms included 5% simple interest, payable yearly, with the bond due in five years. You'd receive $50 each year - paid semiannually for five years - and your original $1,000 back at the end of those five years.

There are no guarantees with bonds. There are a number of risks associated with bonds, including the risk that the issuer will not be able to make regular interest payments or pay the principal when it's due. However, many bonds are rated by agencies such as Moody's and Standard and Poor's. These agencies consider the financial health of the issuer and give it a grade, telling you how likely they think it is that a particular government or corporation will default - or fail to pay on your loan. Higher-risk issuers usually pay higher interest rates on their bonds than do lower-risk issuers. Here is the system Moody's and Standard and Poor's use to rate municipal (or government) and corporate bonds fromBarron's Dictionary of Finance and Investment Terms.1

 
Moody's
Standard and Poor's
Highest quality
Aaa
AAA
High quality
Aa
AA
Upper medium grade
A
A
Medium grade
Baa
BBB
Predominately speculative
Ba
BB
Speculative, low grade
B
B
Poor to default
Caa
CCC
Highest speculation
Ca
CC
Lowest quality
C
C


1 Downes, John and Jordan Elliot Goodman, eds. Dictionary of Finance and Investment Terms. 5th edition. Hauppauge, NY: Barron's Educational Series, Inc., 1998.



 
 
Please consider the objectives, risks, charges and expenses of any Columbia fund carefully before investing. Contact your financial advisor for a prospectus, which contains this and other important information about the fund. You should read it carefully before investing.