Bonds are a measure of a company's debt. This means a couple of things: first that you can't consider yourself part owner of a company because you don't share in its triumphs, but may deal with its tragedies. Something you could see as an advantage though. You would think that debt is a fairly straightforward thing, but there are several choices for the investor. The first choice for investing in bonds is whether or not you want taxable or tax-free bonds. Your choice deals largely with your income level. If you are in a higher tax bracket already, you will likely want to stick to tax-free bonds. If you have a lower income, you may be able to weather the tax burden more and take advantage of the higher rates of these types of bonds.

Second, you want to determine a time horizon. Are you looking at holding bonds for the short-term or the long-term? By going short-term, you protect against a decline in bond prices, but you lose out on annual yield and any appreciable gain in principal.

Because bonds are a promise to pay a set amount of principal at a given time, the further away that time is, the less money the bond will sell for because there is more opportunity a company may default. So if you have two bonds for $100 each but one pays 10 years from now and the other pays 5 years from now, the bond paying in 5 years will sell for closer to $100 than the 10 year note.
Without further ado, here are the types of specific bond issues available to the investor:

Series E&H: These are sold for less than the face value and appreciate TO that value over time. H bonds pay a semi-annual interest rate until the time for the bond expires and the investor then redeems the bond for its face value. E bonds can be cashed in at any time for whatever their value is at that time. These are both TAXABLE.

State and Municipal Bonds: These are more risky than federal bonds because cities and states can default on bonds but are still worth looking at the ratings. These can also be referred to as "muni's" short for "municipal" bonds. These are TAX FREE for federal taxes, and depending on the state, TAXABLE for state tax.

Corporate Bonds: These are subject to state AND federal tax. They provide the highest yield in the bond world, but you have to remember some of that return is reduced by the tax burden.

Other high-yield bonds: These are sometimes referred to as "junk" bonds. They are issued by companies and organizations with lower credit ratings. Because these are riskier, they must offer higher interest rates to entice investors to choose them over safer bonds with lower rates. Typically, you want to STAY AWAY from these. Sure, the high rate may be enticing, but you could end up holding worthless paper if they default. One exception to this rule is if you are buying into a mutual fund specializing in these types of bonds... just make sure they are well diversified.

Savings deposits in lieu of bonds: If bank rates are comparable to short-term bonds, a savings account may essentially be the same thing as investing in bonds.

Some investors may also look at preferred stocks (stocks that offer first payment on dividends) but unlike bonds, these don't guarantee a safety of principal like bonds do.

As with any investment strategy, be sure to diversify! If you decide corporate bonds are the way to go, then make sure you have bonds that represent the market. Either the S&P 500 or the DJIA. There are also several funds you can find that can be an instant way to diversify with bonds for your investment portfolio.