So, Let’s Start with basics…
What are the bonds and different types of bonds?
Bonds are commonly known as fixed income securities and one of the three assets classes individual investors are familiar with. They are used by companies or other entities when they need to raise money to finance new projects, maintain ongoing operations, etc. Bonds in simple terms can be defined as a contract between two parties. Mainly certain companies and the governments issue the bonds because they need to borrow huge amounts of money. They issue bonds and find investors to buy them meaning at some point the bond issuer needs to pay back the money to the investors with interest. Bonds are thus considered as a popular option for those people who need to live off of their investment income. Now as we got the answer to what are bonds, let’s see what is the different type of bonds, they are mentioned below:
- Treasury Securities
Bonds, bills, and notes which are issued by the United States of America are usually called Treasury Bonds which have a high amount and quality of securities available. They are issued by the U.S. Department of Treasury and are liquid and traded usually in the secondary market. They are differentiated by their maturity date which mainly ranges from 30 days to even 30 years.
- Municipal Bonds
Municipal bonds are mainly issued by the state or local government, which are mainly used for construction schools, highways, sewer systems, or any other public project. In some cases these bonds are to be exempt from federal income tax and local taxes as well for investors who live under the jurisdiction of the bond issued.
- Corporate Bonds
Corporates may issue bonds at times to fund a large capital investment or in business expansion. These bonds tend to carry a high level of risk that government bonds because of low-security issues. But generally are considered to be associated with higher profit yields in the market. The value and risk of the bond mainly depend on the reputation of the company that is issuing the bond.
- Zero-Coupon Bonds
This type of bond is generally considered to not make coupon payments but is issued at a steep discount. The bond is redeemed after the maturity date, this type of bond change or fluctuate in price than the other coupon bonds. They can be issued by the U.S. government, local governments, corporations and have long maturity dates.
- Agency Bonds
These bonds are issued by the federal agencies. They are way too different from the mortgage-backed up securities. They aren’t full-faith and credit obligations of the USA government, also the credit risk is very minimal. Interest on these bonds is taxable at both federal and state levels.
- Foreign Bonds
These securities are dollar dominated but its average foreign bond fund has about a third of the assets in foreign currency-denominated debt. With these bonds, the issuer promises to make fixed interest payments and return the principal in another currency. Then the size of these payments is converted into dollars, depending on the dollar exchange rate. If the exchange rates are more than the interest rate then one can determine how to perform a foreign bond fund.
- Mortgage-Backed Bonds
They’ve got a face value of $25,000 compared to $1000 or $5000 for other bonds. As their value drops whenever there is a rise in mortgage prepayments. They don’t benefit much from the declining interest results.
- High Yield Bonds
These are also issued by companies but with weak balance sheets. Their high yield bond prices are more closely tied to the health of the balance sheets. They track the stock prices closely. High yield doesn’t provide the same asset allocation benefits you get by a mixture of high-grade bonds and stocks.
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