Different Bond Types - an Overview - Money Facts Weekly

Different Bond Types - an Overview

Different bond types offer different benefits to an investor’s portfolio. As with stock investing, investors need to diversify their bond portfolios. In order to diversify a bond portfolio, different bond types are needed. There are two main ways to classify bonds into different bond types; the first way is by the the type of issuer that issues the bond and the second is by the characteristics of the bond itself such as interest rates and maturity dates. Below are the most common types of bonds.

Corporate bonds are the most popular type of bonds. Corporate bonds are IOUs issued by corporations to raise money for working capital. Corporations can issue different bond types with different prices, interest rates, call features, and maturity dates. Corporate bonds can be risky if the issuing corporation is in trouble. By looking at bond ratings such as those published by Moody’s Investors Services or S&P, investors can see which ones are safer than others.

Another type of bonds that are popular among investors is the type issued by the US government. These are called US Treasury bills or T-bills, T-bonds, and T-notes. These three different bond types issued by the government have different maturities. T-bills have the shortest maturity dates whereas T-bonds have the longest. In general, investors like Treasury issues because they are backed by the full faith and credit of the US government.

Bonds don’t have to be issued by either corporations or the federal governments, other agencies and municipalities can also issue different bond types. Agency bonds are also considered safe investments, although some may not be as safe as US Treasury issues. Some of them have the backing and guarantee of the US government while others do not. Examples of agency bonds are Fannie Mae bonds and Freddie Mac bonds.

Municipal bonds are also considered safe investments but they also usually do not pay as much interest as corporate bonds. However, municipal bonds or munis for short offer added tax advantages. Their interest payments are usually tax free. Municipal bonds are issued by municipalities such as schools, cities, towns, counties, and states. They can issue different bond types to finance different projects. The terms of different municipal bonds can vary significantly.

Investing in different bond types will enable investors to lower their risk and increasing their returns. By having not only bonds by different issuers but also bonds with different terms, maturity dates, different interest rates and interest payment schedule as well as different risk levels, investors can smooth out the fluctuations of their bond portfolio. There are many different bond types to choose from and there are many tools to help investors choose among them.

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For additional information about the Different Bond Types and each of their individual benefits and drawbacks, stop by the Corporate Bonds information website today.

Published under Investing

1 Response so far ↓

Berchta Dale on Sep 4, 2008 at 7:16 am

Out of many methods you can invest your money Municipal Bonds happen to be one of the famous. However when you invest in Municipal Bonds you have to be aware of municipal bond rates too. Municipal bonds rating indicate the merit of municipal bonds which depends on whether the bond is backed by the full faith, credit, and taxing powers of the municipality or by revenues generated by the municipal facility the bond issue finances. Consider issuer-specific information such as the wealth of the community, characteristic of the issuer, revenue stream of the project the bond is used to fund. By examining the municipal bond, you can see if it should have high ratings or low based on the factors above.

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