As the economy soured, bonds increasingly popped up on the radar screens of many investment advisors. It's easy to see why: With uncertainty everywhere, the traditional benefits of contractually specified cash flows have obvious appeal.

But bond investing long ago left the boring, plain-vanilla realm of clipping coupons. And once you leave the relative safety of U.S. Treasury securities, the nuances of bond investing can become daunting, even in a relatively stable interest rate environment.

Let's start with the basics. Market interest rates are the primary driver of longer-term bond performance. The U.S. Treasury publishes a daily yield curve that illustrates the basic cost of U.S. government borrowing relative to debt maturities ranging from one month to 30 years. That daily yield curve sets a baseline price for risk, as Treasuryspreads continue to increase in tandem with credit risk.

Now it gets complicated. A bond's sensitivity to a change in interest rates can be measured in several ways, with longer-maturity bonds typically being more interest rate sensitive than shorter-maturity ones. But maturity doesn't tell the whole story. Additional factors, such as the size and timing of coupon payments, will determine the duration (or weighted-average maturity) of a bond.

Duration, in turn, may be measured in several ways that account for interest rate changes or redemption provisions. For example, both higher coupon payments and shorter maturities will, in general, lead to lower duration and less volatility relative to interest rate changes. Long-maturity and zero-coupon bonds, by contrast, have longer durations and higher yield sensitivity.

Duration itself, however, is captive to a final measure of interest rate sensitivity known as convexity, which captures the phenomenon of duration changing as yields change. That is—all else held constant—as a bond's interest rate changes, so does the bond's interest rate sensitivity.

Convexity can be quite prominent when an issuer or a bondholder has the ability to alter the cash flows of a bond. For example, as interest rates drop, callable bonds have an increased probability of being brought in at par prior to maturity. As a result those bonds will display negative convexity by experiencing less of a price increase the lower the interest rates drop. Mortgage-backed securities exhibit negative convexity as lower interest rates spur mortgage prepayments that also result in a shortened duration.

In the current environment, there are other considerations that are particularly relevant. The economic headwinds that have buffeted corporate bonds, and risk in general, remain significant. But the rush to liquidity and balance-sheet repair should moderate to a more predictable level. Nonetheless, heightened risk will remain for strategies that employ leverage.

Closed-end bond funds may utilize balance-sheet leverage, in the form of short-term debt or preferred securities, in order to enhance available yields. The idea is to fund the purchase of additional long-term assets with lower cost, short-term liabilities. If short-term rates rise or refinancing options become impaired, the cost of leverage can overwhelm any intended benefit.

Closed-end leverage is also subject to regulatory constraints tied to the value of fund assets. In the event that fund assets fall below 300% of debt or 200% of the value of preferred capital, the payment of dividends to regular fund shareholders must be suspended.

Tim Knepp, CFA, serves as chief investment officer of Genworth Financial Asset Management (an Encino, Calif.-based unit of Genworth Financial), as well as chairman of the firm's investment management executive committee. He can be reached at tim.knepp@genworth.com.