Think "bonds," and you probably think "safe," "reliable" -- in a nutshell, "boring." But that is only half the story. Bonds can provide a worry-free stream of income. But this class of securities includes a wide array of instruments with varying degrees of risk and reward, some of which offer gains -- or losses -- comparable to those of any white-knuckle stock.

Used improperly, bonds can really mess up your financial life. Handled with care, however, bonds are among the most valuable tools in your investment kit. Here are some of the benefits bonds can provide:

• Diversification. Large company stocks have posted compound annual returns of around 11.3% since 1926, versus 5.1% for long-term U.S. government bonds, according to Ibbotson Associates. But while stocks have returned more than bonds over most of this decade, they are also more volatile. Combining stocks with bonds will net you a more stable portfolio.

• Income. Because bonds pay interest regularly, they are a good choice for investors -- such as retirees -- who desire a steady stream of income.

• Security. Next to cash, U.S. Treasuries are the safest, most liquid investments on the planet. Short-term bonds are a good place to park an emergency fund or money you'll need relatively soon -- say to buy a house or send a child to college.

• Tax savings. Certain bonds provide tax-free income. Although these bonds usually pay lower yields than comparable taxable bonds, investors in high tax brackets (generally, 28% and above) can often earn higher after-tax returns from tax-free bonds.

Next: How bonds work