Bonds are not a good place to watch your money grow, though. That's what the stock market and other more aggressive investments are for. Still, many investors who are willing to risk some money in the stock market invest in bonds. Because bonds don't move in tandem with the stock market, many investors buy bonds to diversify their portfolios.

A bond is basically an IOU. Just like when you lend your buddies money, you get a note stating that you will be paid back the amount you lent plus interest by a certain date. But instead of lending money to your buddies, you're lending money to the government, different companies and even private mortgages.

The biggest debtor of them all is the U.S. government. Many people are drawn to government bonds because they are backed with "the full faith and credit of the U.S. government." Face it, the only way you wouldn't get your money back on this investment is if the country topples, and if that happens you'll have bigger problems.

Treasury bonds are for investors who want safety similar to that provided by a government-backed certificate of deposit but with a better rate of return. Treasury bonds that mature in the same length of time as a CD often have better interest rates. (And by mature I don't mean when will the annoying little brother grow up. I'm referring to the length of time - weeks, months, years - before you're paid back.)

Treasury bonds come in three different maturity lengths. Treasury bills mature within a year, treasury notes between one and seven years and bonds take more than a decade.

Just like taxes, the federal government is not the only branch of the government willing to take your money. State and local governments will take your money, too. Only, unlike taxes, with municipal bonds the government will give your money back with interest.

The government is not the only one to whom you can lend your money. Maybe you don't like how the government is handling the budget, and you think the private sector can do a better job handling your hard-earned cash. Then, maybe corporate bonds are for you.

Corporations such as McDonald's and Macy's sell bonds. Just like lending money to your friends or the government, you lend the corporation some money, and they agree to pay you back by a certain date with interest.

Usually.

Now, the chance of being stiffed by the government or a big corporation like McDonald's is pretty remote. Not all bonds are created equally, though.

There is, in fact, a grade scale, complete with letters, for bonds. The scale rates bonds on the issuer's ability to pay back their debt. AAA is the highest rating a bond can receive, followed by AA, A, on down through BBB, BB, B, followed by CCC and so on.

AAA and AA bonds are known as "high-grade" or "high-credit quality" bonds and have less than a 1 percent chance of defaulting. "General" grade bonds are rated A and BBB while "junk" or "high yield" bonds are rated BB or lower.

Now, you may be thinking, "If they go through all of the trouble of grading bonds, why would someone by a bond with a poor ranking? Isn't that like falling for a scam artist on the street, someone who promises he'll pay you back the next time he sees you and then skips town? You had to know that was going to happen."

So, why then do people insist on buying junk bonds? The answer can be found in their marketing creation name, high-yield bonds. With greater risk comes greater reward. Sure, there is a higher chance of being stiffed when it comes to investing in junk bonds. If you do get paid back, though, on these high yield bonds, the interest you'll see will be greater than if you'd invested in a high-grade bond.

If corporate bonds aren't your style, many banks sell their home mortgages as bonds in the financial markets to private investors. The repayment on the principal at the bond's maturity is usually guaranteed by the Government National Mortgage Association (Ginnie Mae) or the Federal National Mortgage Association (Fannie Mae.)

For the indecisive investor, there are convertible bonds. Like the name says, these bonds allow the investor to convert the bond into a preset number of shares of company stock. That way, if the company enjoys some success and the stock's price rises, the investor can still share in some of the growth of the company. The investor does pay for this added feature, though. Convertible bonds' generally provide a lower yield than their fixed counterparts.