Different Types of Bonds

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Different Types of Bonds

Most people know about the basics of investing in the stock market but many people are puzzled as to what bonds are. In one word, a bond is a loan. The loans can be from the federal government, a federal agency, municipality, or corporation. When you purchase bonds you are lending your money to whomever you buy the bonds from. In return for lending them your money you are paid a fixed rate of interest over a set period of time. When the bond matures the investor’s money is usually returned with the earned interest included. Bonds are like stocks because they are both traded. Therefore you can buy the bonds after they are originally issued while at the same time you can sell bonds before they mature. Bond prices are subject to volatility in relation to market conditions

Investing in bonds is really safe, and the returns are generally very beneficial. There are four common types of bonds available and they’re sold through the Government, through corporations, state and local governments, and foreign governments.

The best thing about bonds is that you’ll get your initial investment funds back. This makes bonds the perfect investment vehicle for those who are new to investing, or for those who have a low risk tolerance.

The United States Government sells Treasury Bonds through the Treasury Department. You may buy Treasury Bonds with due date* ranging from three months to thirty years.

Treasury bonds include Treasury Notes (T-Notes), Treasury Bills (T-Bills), and Treasury Bonds. Every Treasury bonds are backed by the United States Government, and tax is only billed on the interest that the bonds earn.

Corporate bonds are sold through public securities markets. A corporate bond is basically a company selling its debt. Corporate bonds generally have high rates of interest, but they’re a little risky. If the company goes belly-up, the bond is useless.

State and local Governments also sell bonds. Different bonds issued by the federal government, these bonds normally have higher rates of interest. This is because State and Local Governments may indeed go belly-up – unlike the federal government.

State and Local Government bonds are free from income taxes – even on the interest. State and local taxes may as well be waived. Nontaxable Municipal Bonds are basic State and Local Government Bonds.

Buying foreign bonds is really very hard, and is frequently done as part of a mutual fund. It’s often very risky to invest in foreign countries. The safest type of bond to purchase is one that’s issued by the US Government.

The interest possibly a little lower, but again, there’s bitty or no risk involved. For best results, when a bond reaches due date, reinvest it into another bond.

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January 13 2009 08:28 am | Personal Finance

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