In today's low interest-rate environment, many families are turning to bonds and bond funds for income and safety.

But, as we've warned before, you have to be careful with bonds. Bond prices and interest rates move in opposite directions. So if interest rates rise, bond prices fall if you go to sell them.

If you invest in corporate bonds, there is an added danger that the company could go out of business and fail to pay its debts.

A bond actually is an I.O.U. When you buy a bond, you're the lender. In exchange for a loan, the borrower or issuer promises to pay you periodic interest and repay your principal on a specific date. There are several types of bonds, and it is important to know the difference between them.

United States government bonds are considered the lowest- risk bonds because they are issued and backed by Uncle Sam. They require an investment of $1,000 for maturities ranging from three months to 30 years, and are yielding up to a little over 5 percent. But even with U.S. government bonds, you run the risk that bond prices will fall if interest rates rise. Yes, even with these, you could lose principal if you go to sell them.

Corporate bonds, which also require as little as $1,000, are issued by corporations. The financially strongest companies' bonds carry single A to triple A ratings by Standard & Poor's and Moody's. High-quality corporate bonds are yielding between 3 percent and 8 percent.

Municipal bonds, generally issued by city, state and local governments, can be an ideal income investment if you're in a high tax bracket. You generally buy them from a brokerage firm, which typically requires a $5,000 to $10,000 minimum. The interest income from these bonds is tax-free. So although today's municipal bond rates don't seem very impressive -- around 4.8 percent, someone in the highest tax bracket actually is earning significantly more when the tax benefits are factored in.

High-yield bonds are corporate bonds issued by companies with credit ratings, typically BB and below. Currently yielding 8 percent or more, these are among the highest-risk types of bonds, so you don't want to bet the ranch on them.

Another big question we often hear is whether you should invest directly in bonds or invest in bond mutual funds, which invest in a number of different bonds.

With bond funds, an investment company professionally manages your bond holdings, examining the credit risk and buying and selling to cut losses due to interest rate changes. Because bond funds own a large number of bonds, you have a cushion if a few do poorly. You generally can invest in a bond mutual fund for as little as $1,000, or $500 for an IRA. Subsequent investments can be as low as $50. You can buy a bond fund either directly from a mutual fund company or through a broker. If you do select a bond fund, you need to know which types of bonds are in the fund, because your level of risk and taxes can vary accordingly.

But there are some other important issues to be aware of when weighing bonds against bond funds.

Unlike bonds, which guarantee to repay your principal at maturity, bond funds do not guarantee that you will get your principal back. In fact, you should expect your bond fund principal to fluctuate. A bond fund does not mature because your fund manager constantly is buying and selling bonds.

With a bond fund, you pay an ongoing management fee and other expenses that average 1 percent annually, according to Morningstar Inc., Chicago. Plus, you might pay a load, or commission, of about 4.5 percent. By contrast, if you buy a Treasury bond, it's free if you go through the Federal Reserve Bank. You also can invest in Treasury bonds for free over the Internet at www.publicdebt.treas.gov.

If you buy a bond from a broker, the brokerage firm may mark up a bond as much as 2 percent to 4 percent before selling it to you. To find out what this markup is, ask your broker the difference between the "ask price," or the selling price of the bond, and the "bid price," or price the broker will pay to buy it back from you.

Unlike bonds, which typically pay interest semiannually, bond funds generally pay interest only monthly -- an important factor to consider if you're relying on monthly income to live on.

With bond funds, you can opt for a monthly check or to reinvest interest into new shares of your fund. Reinvestment of interest is not an option with bonds.