Unraveling the Different Types of Bonds
Before investing in any of the different types of bonds, you should become as educated as possible. Once you familiarize yourself a bit with the many different choices you have, you will feel more secure in knowing you have made the best financial decision possible.
Municipal Bonds:
These are low risk bonds. People who are big into saving love these types of bonds. Depending upon where you are located, these bonds may come with tax free dividend payments. The interest rate on municipal bonds is fairly low, however. The government backs up these bonds with a guarantee.
US Treasury Issues:
These bonds are popular with investors because they are guaranteed by the government. However, the returns leave much to be desired. There is a Federal tax on these, but there's no state or local tax.
Corporate Bonds:
Corporate bonds can sometimes be a safer bet than government bonds. You can generally look at the financial condition of a company and get a decent feel for whether or not it would be safe to invest. Even though the financial condition of a company is subject to change at any point in time, there is always some amount of risk involved when it comes to investing. There are a lot of different variations for these types of bonds. Most times they will vary depending on the duration of their maturity, the amount of risk involved and their sector.
There are actually certain corporate bonds that are callable. What this means is that in the event that interest rates go down drastically, you can be paid out early and they will let you out of the long term commitment.
The amount of the interest payment may depend on how high yield a bond or fund is. This can be great if everything is going smoothly with the market. However, the value will majorly decrease as the market falls. This is in terms of a high yield bond being sold of course. If you continue to hold on to it until it matures then everything will be fine as long as the company is going to have the ability to pay you for it.
The opposite scenario may also come into play. You could purchase a high yield bond just when everything seems like it is at its worst. Then it may turn out that the economy is on the road to improvement and all of a sudden the value will shoot up again. This is the same concept as the stock market.
Agency Bonds:
These types of bonds are issued by the US government, but most of them do not come with a guarantee. However, there are a few exceptions.
They usually get linked with an asset, such as real estate. They get placed in the category of collateral-backed mortgages. These bonds are riskier than US Treasury issues, so they have a higher potential for return. Institutional investors will usually buy these types of bonds in large amounts.
By learning about the different types of bonds you are one step closer to making a sound decision about your financial investment.
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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