What are the Different Types of Bonds?
Before jumping in and making an investment, it is wise to learn a little bit about the various types of bonds. This will ensure that you make the best choice possible for your own financial security and future. There are three major types of bonds to discuss:
Government bonds:
The federal government issues these types of bonds as debt securities. The Treasury Department issues US government bonds which are often called treasuries. The three types of securities that are offered by the Treasury are:
* Treasury Bills- mature in a year or less * Treasury Notes- mature in 2-10 years * Treasury Bonds- mature in 30 years
Treasury securities are known for being very safe. There is a big secondary market for Treasuries, so it is easy to purchase or sell the securities. Mortgage backed securities are really well known as far as agency bonds.
You can of course purchase them through a broker, but you can also get them straight from the US Treasury at their website.
Municipal Bonds:
The sales from these types of bonds are used to finance the government's construction projects. People love that the interest paid on these bonds is tax free. Those that issue municipal bonds have credit ratings. What these do is determine an investor's potential to get the interest and principal payments. You can buy municipal bonds through a broker or a dealer.
Another thing people like is that the interest from municipal bonds is exempt from federal taxes. The interest is also exempt from state taxes when you buy the bonds in the state in which you live. If you live in a high income tax state you have the ability to earn double tax exempt interest when you purchase bonds locally.
Corporate Bonds:
Corporations use bonds as a way to borrow money in order to finance their own growth. They pay a higher interest rate because they are a higher risk. If you look at the issuing corporation's credit rating you can determine the level of risk involved. If the rating is BBB up to AAA then this would be considered a sound investment. If the bonds are coming from issuers who have a credit rating lower than BBB, you should beware. These bonds are also called junk bonds or high yield bonds.
These high yield bonds can sometimes end up bringing some nice returns to the investor, however. If the economy is on its way back up, then once their financial situation improves and their credit rating goes up again the value of the bonds will go up as well. Investors will enjoy high income and capital gains. On the flip side, a recession or economic crisis can cause investors to experience negative returns on high yield bonds.
It would be nice to have some good, sound AAA Corporate bonds during a slowing economy, more so than government bonds. This is because they will provide you with a better income. This is exactly why it is so important to have an understanding of the different types of bonds, as well as when and how to use them.
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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Word Count: 538
Date: Fri, 11 Mar 2011
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