The Various Types of Bonds
If you are considering making an investment, it is a good idea to educate yourself on the different types of bonds available to you. In general, bonds are known in the investment world for being very sound, stable investments. Investors like to use bonds in their portfolio as a means of balancing out the risk that they sometimes take with their stock purchases.
The following are some of the most commonly purchased types of bonds:
US Treasury Issues
The US government guarantees these bonds, so they are pretty popular with investors. The only thing is they don't have such great returns. There is no state or local taxes charged on these bonds, however there is a Federal tax charged. There are several types of US treasury issues, including: treasury notes, treasury bonds, treasury bills and Treasury Inflation Protected Securities (TIPS).
Agency Bonds
US government organizations issue agency bonds, however the US government does not guarantee most of them. There are a few exceptions though.
Usually these are linked with an asset, like real estate for example. This would put them in the category of collateral-backed mortgages. You would have a higher potential for return on these bonds than you would with US Treasury issues because they are exposed to a higher amount of risk. These types of bonds usually get purchased in hefty amounts from institutional investors.
Corporate Bonds
These bonds get issued by corporations to finance projects which are considered to be long term. They would rather do this than go through banks or deal with stocks. These types of bonds are not considered to be that secure. Still, once again the higher risk is supposed to be worth it considering the greater potential for a return on investment.
Also, sometimes corporations will even issue convertible bonds. What this means is that they are able to be turned into stock. Callable bonds may also be issued, and the company decides at what point they get redeemed before their maturity is reached.
Municipal Bonds
States, counties and cities issue these types of bonds. The reason why they usually do this is in an attempt to receive extra funds for various infrastructure projects. Examples would be if there were financing needed to build a new school or to work on the roads.
These types of bonds offer a decent amount of security, and what is even better about them is that they are exempt from all Federal taxes. Most people who like to be conservative with their investments prefer municipal bonds.
Zero Coupon Bonds
Even though you wouldn't get paid interest regularly, you could purchase zero coupon bonds at a great discount. What happens to the interest is that it accumulates and then when the bond matures the bondholder can collect on it.
Learning about bonds is the first step to making the right choices when it comes to investing. Everyone has different investment styles and financial needs, so it's best to examine the options closely in order to determine the types of bonds that will work best for you.
Article Source: FxTradingStock.com
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Next, find out more about types of bonds in the best specialized website available on such delicate topic.
by: Joe Maldonado
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Date: Fri, 11 Mar 2011
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