Types of Bonds

Before you invest in bonds, you should learn more about them. You need to understand the different types, how they mature, and how much you can earn from your investment.

When purchasing a bond, there are three important things to consider: the par value, the maturity date, and the coupon date.

The amount of money you will receive when a bond reaches maturity is the par value. The maturity date if the date the bond will reach its full value. You will receive your initial investment plus any interest earned. The coupon rate is the interest you receive when the bond reaches maturity. This is a percentage of the bond value and is the amount of interest it will earn until it reaches maturity.

The types of bonds are:

Treasury Bonds

Treasury bonds are issued by the United States Government Treasury Department. Bonds can be purchased with maturity dates ranging from three months to thirty years. Treasury bonds also include Treasury Notes (T-Notes) and Treasury Bills (T-Bills). All Treasury bonds are backed by the U. S. government and tax is only charged on the interest the bonds earn.

You can purchase Treasury bonds through a broker and pay a commission or you can purchase them directly from the Treasury Department through Treasury Direct. You do not pay a commission on bonds purchased directly from the Treasury.

State and Local Bonds

These bonds are issued through state and local governments. They usually have a higher interest rate than Treasury bonds. You do not have to pay income taxes on the interest earned by these bonds. State and local taxes may also be waived. The most common bonds are Tax-free Municipal Bonds.

Corporate Bonds

Corporate bonds are sold through public securities markets. The company is selling its debt through bonds. They have a high interest rate but are very risky because the company can be dissolved.

Corporate, state, and local bonds have higher risks than Treasury bonds. These bonds can be "called" before they reach their maturity date. The issuer will return your initial investment along with the interest that has been earned so far. The risk is that state and local governments as well as corporations can go bankrupt and you may lose your money.

Bonds issued by the U. S. Treasury are a safe investment. However, if you are an aggressive investor you can take a chance and invest in corporate, state, and local bonds. You do need to understand the risks you will be taking with your money.