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Types of Bonds

By definition, bonds represent a way for borrowing money from the public. Bonds are famous among investors for the high level of stability and security they offer. As a result they represent one of the most important components of every investment portfolio to balance the uncertainties of stocks and the overall market dynamics.

Some of the major types of bonds include:

  • US Treasury Issues

    They are guaranteed by the US government and thus represent one of the most favored bonds by investors. However, the returns on these bonds are quite low. There have been cases in which the return has not managed to keep up with the rising levels of inflation. Earnings on the US Treasury issues are free from both state and local taxes. Federal taxes are charged.

    Some of the US Treasury issues types include:

    • Treasury bonds
    • Treasury notes
    • TIPS (Treasury Inflation Protected Securities)
    • Treasury bills
  • Agency Bonds

    These bonds are issued by US government organizations. However, most of them are not guaranteed by the US government even though there are some exceptions.

    Generally, an asset (e.g. real estate) is tied to the loan, which categorized these bonds as collateral-backed mortgages. Since they are exposed to higher levels of risk, the potential returns are also higher than those gained through US Treasury issues. The most common purchasers of these bonds are institutional investors that purchase them in large denominations.

    Some of the agency bonds offered include:

    • Government National Mortgage Association (also known as Ginnie Mae)
    • Federal National Mortgage Association (also known as Fannie Mae)
    • Federal Home Mortgage Corporation (also known as Freddie Mac)
    • Student Loan Marketing Association (also known as Sallie Mae)
  • Corporate Bonds

    In order to provide financing for long-term projects, corporations may also issue bonds. This technique is preferred over the issuance of stocks or lending money from banks.

    Bonds issued by corporations are of a more insecure character. However, this greater level of risk is compensated by the higher potential returns.

    What is more, corporations may issue bonds of a convertible character, which means converting the bond into stock. Additionally, they can issue callable bonds, which may be redeemed on the discretion of the company before they reach their maturity.

  • Municipal Bonds

    Some of the issuers of these bonds include states, counties, cities, and etc. They do this in order to get additional resources for the financing of different projects, mainly in the infrastructure field. For instance, money may be needed for the construction of new roads, schools and etc.

    Municipal bonds are characterized by substantial security. What makes them more attractive is their exemption from federal taxes. As a result, they are a preferred investment tool for investors that prefer a conservative way of investing.

  • Zero Coupon Bond

    Zeros are purchased at deep discount, but they don't pay interest on regular basis. Instead, the interest is accumulated and paid to the bondholder when the zero matures.

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