Different Types of Bonds
Investing in bonds is very safe, and the returns are usually very good. There
are four basic types of bonds available and they are sold through the
Government, through corporations, state and local governments, and foreign
governments.
The greatest thing about bonds is that you will get your initial investment
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 can purchase Treasury Bonds with maturity dates ranging from
three months to thirty years.
Treasury bonds include Treasury Notes (T-Notes), Treasury Bills (T-Bills), and
Treasury Bonds. All Treasury bonds are backed by the United States Government,
and tax is only charged on the interest that the bonds earn.
Corporate bonds are sold through public securities markets. A corporate bond is
essentially a company selling its debt. Corporate bonds usually have high
interest rates, but they are a bit risky. If the company goes belly-up, the bond
is worthless.
State and local Governments also sell bonds. Unlike bonds issued by the federal
government, these bonds usually have higher interest rates. This is because
State and Local Governments can indeed go bankrupt – unlike the federal
government.
State and Local Government bonds are free from income taxes – even on the
interest. State and local taxes may also be waived. Tax-free Municipal Bonds are
common State and Local Government Bonds.
Purchasing foreign bonds is actually very difficult, and is often done as part
of a mutual fund. It is often very risky to invest in foreign countries. The
safest type of bond to buy is one that is issued by the US Government.
The interest may be a bit lower, but again, there is little or no risk involved.
For best results, when a bond reaches maturity, reinvest it into another bond.
